Is there a pile of debt that’s been sitting on your credit history for a number of years now? You might be able to get out of this after all, although you can’t get rid of it completely. Depending on which province you live in, laws about the statute of limitations might keep creditors from dragging you into a courtroom, but those debts can still linger on your credit history. The longer that you dither before making this decision, the worse the impact can be on your credit history — and on your personal financial situation.
Here’s how it works. Statute of limitations laws can keep creditors from filing suit against you for unsecured consumer debt after a specific period of time has elapsed. This is not true for student loans or cash that you’ve borrowed from other government sources. As you might expect, the government has passed laws to exempt itself from the same laws that it passes that affect private industry. The window for the statute of limitations does not start when you take out the loan, though — instead, it starts when you make your last payment and then stop paying.
If you live in Labrador, Newfoundland or B.C., unsecured debt is officially “extinguished” after the limitation period stops, as long as you don’t make any payments or acknowledge your debt in writing. In Saskatchewan, Alberta, B.C. and Ontario, that limit is two years; in the rest of Canada, the period is six years. Creditors are still allowed to attempt collection, but if you are sued you can file a defence in court indicating that the limitation period has expired.
Creditors do have some tricks they will try to get you to think that the clock has started over. Sometimes, creditors will piece off their older debts to collection agencies who will then go after those balances as if they are new debt. It is legal to sell the debts, but it is not legal to act like the debts are new, since they are not. If you don’t know your rights, you can be suckered into thinking that this is a new debt. Some collectors like to try to scare debtors into admitting what they owe in writing, which actually does start the limitation period over again.
Obviously, this is not the best solution to your financial problems. If you are trying to use the statute of limitations to keep from having to repay debts, you’re never going to have a credit score that will do you much good, and you’re not doing anything to fix the financial problems that you have.
Also, if one of your creditors is a bank where you have opened a chequing or savings account, your bank can take your money as a way to get that debt back, even if the limitation period has expired. The right that a financial institution has to get its money back (called the “right of set-off”) overrides your consumer protections according to statute of limitations law.
In Canada, debt can stay on your credit report for six years after the account indicates that your creditor has written off bad debt. Equifax Canada keeps it for that time period, while TransUnion, the other major credit bureau in Canada, keeps the delinquent data on your report for six or seven years after the most recent default or payment date. You can dispute errors and have those deleted. However, if the debt is valid, only the collection company or creditor can request a deletion. Even if you make the payment, the impact on your credit report will persist.
So the only people who really benefit from this statute of limitations provisions is what creditors call “judgment proof” debtors — parties without any assets or income and who are never likely to repay their debts anyway. If you are in that situation, you might be well served by talking to a bankruptcy trustee. They offer free consultations and can tell you the benefits and drawbacks of using expired limitation periods to get rid of debt. Legal aid organizations also provide low-cost sessions that allow you to meet with a lawyer to talk about your debt solutions. Every case is different, but the resources exist to help you get legal advice about the best solution for your situation.