For businesses that provide credit to a high volume of customers, the use of credit reporting agencies can be an important part of a comprehensive debt collection strategy, particularly for small amounts where other collection methods are not cost effective.
While the law provides certain protections to businesses that report debtors to credit reporting agencies, there are certain risks inherent in the process of publicizing a person’s debt in this manner. Although this risk cannot be entirely eliminated, the best practices mentioned below can help in limiting the potential liability arising out of credit reporting.
Indeed, there are, broadly speaking, two areas of potential legal liability for Canadian businesses reporting unsatisfied debts to a credit reporting agency: (1) A business can potentially contravene consumer protection legislation such as the Ontario Consumer Reporting Act; and (2) A business can be found liable at common law for defamation or other related claims.
While consumer protection legislation varies from province to province, much of its application deals with governing the conduct of credit reporting agencies, rather than governing parties who report debts to credit reporting agencies. These consumer protection statutes do, however, provide that a person may be subject to fines or imprisonment if they knowingly supply false or misleading information to a credit reporting agency. As these provisions are designed to protect consumers from intentionally wrongful acts, they will have limited impact, if any, on parties who report debts in good faith.
Similarly, in order for a debtor to be successful in a claim for defamation or related legal claims, the debtor must prove not only that a credit report was false, but that it was made for malicious purposes. This is because reporting genuine unpaid debts to a credit reporting agency is seen as being in the interests of society, meaning that such reports are protected by what is referred to as “qualified privilege.”
In order to avoid potential lawsuits from frustrated debtors, or minimize the negative consequences of such lawsuits, businesses should consider implementing the following practices prior to reporting a debtor to a credit reporting agency:
- Contracts should explicitly state that unpaid accounts may be sent to credit reporting agencies;
- Accounts should be manually reviewed prior to being reported, including a full review of the account history and any communications or complaints from the customer;
- Each step in the collection process, such as the sending of notices to a delinquent account holder or the results of a review of an account, should be well documented;
- Once a delinquent account has been reported to a credit reporting agency, any requests to review the account for accuracy should be dealt with promptly, to ensure that any accounts reported in error are caught promptly and before the resulting damage has escalated.
While these steps will not guarantee immunity from lawsuits from disgruntled customers, they will, in conjunction with the qualified privilege afforded to such reports, help to minimize the risks as much as possible.