As documented in a recent post on Insolvency Insider, publicly available statistical data is showing a rising trend in the forced sale of properties by unsecured creditors (that is, creditors other than the mortgage company).
This is not a new right or a new law.
It is established law that exists in some or all the common law provinces, including Ontario and Alberta.
So why is this now noteworthy?
The next few sections will help set the context before you read The risk and What can you do?
Creditors are realizing two important things.
- They are at increasing risk of not getting their money back. Inflation, rising interest rates, and declining consumer confidence all increase that risk. If they do not take aggressive action before other creditors to whom you also owe money, they may recover little or nothing.
- Consumers are becoming increasingly aware of their rights under the Bankruptcy and Insolvency Act, including Canadian bankruptcy, Canadian consumer proposal, and orderly repayment of debt (available in Alberta). Once a consumer files for protection, unsecured creditors are placed into the same legal position. This knowledge by Canadian debtors is becoming much easier to access because of several factors, including public education by the Office of the Superintendent of Bankruptcy, the growth of the debt advisory marketplace (which ranges from knowledgeable, even if unlicensed and unregulated, professionals to outright scam artists), online advertising, educational blogs written by Licensed Insolvency Trustees, and AI summaries that are generally accurate but not always complete.
Before going further, let me define an “unsecured creditor” in practical rather than legal terms.
An unsecured creditor is someone to whom you owe money, but who does not have a mortgage against your home or a lien against your vehicle or other property such as a boat, trailer, or investments.
Examples include:
- Credit cards
- Payday loans
- Personal loans
- Taxes owed to the Canada Revenue Agency (“CRA”), although CRA has unique and very powerful collection rights that deserve their own discussion below.
(small warning: some of these debts can be secured although many will not be. The answer is in the loan agreements).
What can an unsecured creditor do?
Most of us know someone who has gone through the stress of falling behind on debt or perhaps have experienced it ourselves.
Generally, the process follows these stages.
a) You receive a reminder by telephone, text message, email, or on your monthly statement advising that your payment is overdue.
b) The account is transferred to an internal or outsourced collections department. Their role is to “encourage” you to make them the creditor you pay before anyone else – the most difficult and persistent collector is often the one who gets paid first. Collection practices are regulated primarily by provincial legislation, although not every collector follows those rules. Because many consumers are unfamiliar with their rights (that is how to set boundaries), collection efforts often become increasingly aggressive as the account is escalated.
c) If payment is still not received, the account is usually transferred to a lawyer or paralegal, depending on the amount involved. A lawsuit is commenced. If you do not file a defence within the required time, the creditor will usually obtain what is known as a default judgment. Even if you do file a defence, unless there is a genuine legal dispute, it generally serves only to delay the inevitable. Unless a financial miracle occurs, the underlying problem remains the same – you have only delayed the inevitable.
d) The creditor now has a judgment against you.
Judgment against you – consequences
A judgment carries significant consequences.
- It appears on your credit bureau with potentially long-term harm to your ability to borrow as well as scare off potential employers.
- It becomes part of the public record and can be searched by anyone.
- Borrowing money to pay off the judgment becomes considerably more difficult and often more expensive as you can be perceived as higher risk. A lender may require security or even a co-signer.
- You may be ordered to attend a judgment debtor examination under oath and produce documents such as RRSP statements, pay slips, banking information, and other financial records that the creditor can use to assist in collection. Most people are honest and do not wish to turn a financial problem into a criminal one by giving false evidence under oath. Having to disclose all your financial information to a creditor is an uncomfortable experience, but understanding what comes next is even more important.
The risk
A judgment creditor has invested time and money obtaining a judgment, costs that are often added to the amount you owe. They generally intend to use that judgment to collect from you.
For smaller debts, the creditor will often attempt to:
- Freeze and seize your bank account.
- Garnishee your wages through your employer.
Where the debt is larger, or those above noted collection efforts have not been successful, the creditor may obtain a Writ of Enforcement in Alberta or a Writ of Seizure and Sale in Ontario. A bailiff may then seize your non-exempt personal property in accordance with provincial exemption legislation.
See the linked articles regarding exemption rules in Ontario and Alberta.
And now to your house getting sold from under you
There is no requirement for a creditor to work through every collection stage before proceeding against your property. Depending on the circumstances, the creditor may move directly from obtaining judgment to enforcing it against your assets. The creditor’s objective is to move as quickly as possible to get paid.
For simplicity, I will use Ontario as the example.
The Sheriff’s sale of land (your home)
When a creditor obtains judgment, one of the first steps is often registering that judgment against the title to your home. Once the judgment is registered, you will generally (exceptions lie within certain protection rights available to debtors who access protection under the Bankruptcy and Insolvency Act through, for example, a consumer proposal or bankruptcy) be unable to sell or refinance your property without dealing with that creditor first.
The creditor may then obtain from the court and register a Writ of Seizure and Sale, which is filed with the Sheriff’s office in the municipality or county where your property is located. Like the judgment itself, this also becomes part of the public record.
The Sheriff can then receive instructions to auction the property. Because these sales are public, they often do not achieve the same price as a traditional sale through the real estate market.
In many parts of Ontario, property values have stopped rising and, in some areas, have declined. As property values fall, the equity remaining after mortgages and unpaid property taxes becomes smaller. Judgment creditors recognize that waiting may reduce the amount available for them to recover, so they are moving more quickly than they did during years when real estate values consistently increased.
When values were climbing, many experienced judgment creditors were content to leave their Writ of Seizure and Sale registered against title while earning a healthy rate of interest secured by your home.
Today, the environment is changing.
The Sheriff’s “For Sale” sign may appear much sooner than many people expect.
What can you do?
You can try to repay the debt or negotiate payment terms. In my experience, however, this is rarely an equal negotiation. The creditor wants their money much faster than most people are realistically able to pay. The cost of refinancing (if available in a declining market) is usually at much higher interest rates.
You can also try to defend the legal action through a lawyer, but on what grounds? If you owe the money, there may be very little legal defence available. A lawyer may be able to buy you some time, but unless there is a financial miracle on the horizon, additional time alone does not solve the problem. You must also consider how you will pay legal fees while already struggling with debt.
Fortunately, in Canada there is another option.
You can contact a Licensed Insolvency Trustee (“LIT”). These federally licensed professionals provide free consultations and are required by both law and professional ethics to explain all of your available options based on your specific circumstances, including options that they do not personally administer such as orderly repayment of debt, refinancing, etc.
A Licensed Insolvency Trustee has years of education and practical experience dealing with debt problems. Their role is not to judge you. Every year, well over 100,000 Canadians require formal protection under the Bankruptcy and Insolvency Act. Financial difficulties happen to people from every profession, every income level, and every stage of life.
The most common protection chosen by Canadian consumers is the consumer proposal. A consumer proposal is a settlement offer negotiated by your Licensed Insolvency Trustee with all of your unsecured creditors. Only a Licensed Insolvency Trustee can administer a consumer proposal.
One of the most important benefits of a consumer proposal is the automatic Stay of Proceedings that comes into effect immediately upon filing. This legal protection stops unsecured creditors from continuing collection action against you. If the Sheriff has not completed the seizure and sale process, the Stay of Proceedings also prevents that enforcement from continuing.
Timing matters.
Imagine an arrangement where you pay an amount that is both affordable and fair to your household, where you keep your assets (e.g. house) unless you choose otherwise, and where, if the majority by dollar value of your creditors accept the proposal, the agreement becomes legally binding on all unsecured creditors under federal law.
There is no bankruptcy.
There are no notices published in the newspaper.
The protection is even effective against CRA, although certain exceptions exist. This is why it is so important to meet with a Licensed Insolvency Trustee to receive advice based on your own circumstances rather than relying on general information found online.
CRA has special rights
Because CRA is what is commonly referred to as an involuntary creditor, it enjoys collection powers under Federal tax legislation that other unsecured creditors do not. Unlike a bank or credit card company, CRA never chose whether to lend you money. Tax debts arise because of legislation such as the Income Tax Act or the Excise Tax Act (GST/HST), and Parliament has given CRA unique enforcement powers to collect those debts.
In summary, CRA does not need to go through the same court process as other unsecured creditors before freezing bank accounts or garnisheeing wages.
CRA states on its own website:
“We usually send you a letter to let you know that we have certified your debt in Federal Court. The letter tells you that if you don’t fully pay your account, we may take further legal action to pay your debt. In some cases, such as when debts are at risk of not being collected (in jeopardy), we may tell you verbally that we have certified your debt in Federal Court.”
Read that statement carefully.
The word “usually” means not always.
Likewise, “may tell you verbally” also means they may not tell you at all.
Accordingly, it is entirely possible to wake up one morning and discover that CRA has effectively placed a mortgage against your home.
CRA can register a lien against real property without following the full court process required for most unsecured creditors. Instead, CRA obtains a certificate from the Federal Court certifying the unpaid tax debt. Once issued, that certificate has the same legal effect as a court judgment, but it is obtained much more quickly and without many of the procedural steps that usually apply to civil litigation.
After certification, CRA can register the debt against your property. I often describe this as an “uninvited mortgage” because it can significantly affect your ability to sell, refinance, or transfer your home.
As a fellow taxpayer, I am not criticizing CRA’s unique collection powers. Parliament intentionally granted those powers for policy reasons.
The point is simply this: if you have tax debt that you cannot realistically pay, you need to understand the risks before CRA begins taking enforcement action.
Speaking with a Licensed Insolvency Trustee early can make an enormous difference.
Speak with Baigel Corp. before a creditor makes the decision for you
If you have received collection calls, legal documents, or a judgment against you, or if you are worried that a creditor may begin enforcement proceedings, the most important thing you can do is seek advice before matters escalate. The sooner you discuss the situation; the more solutions may be available to you.
Baigel Corp. provides confidential, no-charge consultations with federally licensed and regulated Licensed Insolvency Trustees. We will explain all of your available options, including those we do not provide ourselves, so that you understand exactly where you stand and what protections may be available to you.
The earlier you seek advice, the more options are usually available.
If you are concerned about unsecured creditors, CRA collections, wage garnishments, or the possibility of losing your home, contact Baigel Corp. today and arrange your free consultation. Acting before the Sheriff arrives is almost always better than reacting after enforcement has already begun.
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee