In Canada, the statute of limitations prohibits creditors from collecting or suing for unsecured debt in certain situations after a certain time period has passed. Keep in mind that the debt still exists, however it can not be collected by the creditor.
Expiry places you in a favourable position to negotiate a good settlement. Student loans and other forms of government borrowing are exempt from this rule, so those debts will need to be repaid in full.
More about Limitation Periods
Limitation periods generally apply pressure on creditors to take action within a specific time period, after which it becomes impossible for them to collect monies for unpaid debt.
Here are a few things to keep in mind about the expiry of debt:
- Limitation periods are different in each province, though they usually range from 2 to 6 years. Since January 1, 2016, that period was set as 2 years in Ontario, Alberta, British Columbia, New Brunswick, and Saskatchewan; 3 years for Quebec; and 6 years for everywhere else in Canada. There are different rules if the creditor has obtained a judgement and this only stops them from taking legal action. This also only applies to consumer credit and not items such as Student Loans, Taxes, Alimony, and Child Support.
- Limitation periods are only applicable when dealing with unsecured creditors. In other words, a debtor cannot benefit from expiry of the limitation period for secured debts.
- The limitation period is counted from the date of your last payment. If you want to be discharged from the debt, you must not make any payment – in part or in full – to the creditor until the limitation period has expired. Otherwise, you have to start over from the newer date of last payment. If you prepare a written acknowledgement of the debt before the limitation period expires, it will serve as the “newer” date, prolonging the expiry of your debt.
- Once the limitation period expires, you are no longer obligated to make the payments. So any action you take has no effect on the debt.
How to take advantage of the limitation period
If you are struggling with debt and find yourself several months late on one or more payments, and the limitation period in your territory has not expired, you may choose to wait and see whether the creditors will take action before making any more payments.
But if the limitation period on any of your debts has expired, you can approach the creditor to negotiate a favourable one-time settlement – like 20 percent of the amount. At this point, you should consider debt counselling. A licensed insolvency trustee can assist you with the settlement negotiations such as a consumer proposal with all your creditors to get you the best deal possible.