One question that we get from our customers has to do with what happens to debt over time, and how that affects their credit scores. Not a lot of people know what creditors can do with respect to writing off bad debts, sending debts to collections and referring debts for legal action. Within Canada, each province has its own law about the statute of limitations for legal action. Provinces also set their own laws for limiting the period of time in which reporting to credit bureaus takes place.
Let’s take a look at the different amounts of time that each province sets from the time a debt is incurred (or a consumer receives notice that a debt has become delinquent) to the point when a creditor can file a claim statement for compensation, either in small claims court or in general court.
British Columbia: 2 years (general limitation) / 10 years (judgment limitation)
Alberta: 2 years / 10 years, with the limitation period suspended if the creditor has a time of disability
Saskatchewan: 2 years / 10 years, with no period extending beyond 15 years even in the case of creditor disability
Manitoba: 6 years / 10 years, with no period extending beyond 30 years even in the case of creditor disability or intervening payments taking place
Ontario: 2 years / No limit, but with no period extending beyond 15 years for non-judgment debts, even in the case of creditor disability or intervening payments
Quebec: 10 years / 10 years. In Quebec, limitations are referred to as “prescriptions.” Quebec law is unique, and their disposition can be complicated
Newfoundland: 6 years / 10 years, with a limitation of two years on damages causing economic loss
New Brunswick: 2 years / 20 years, although limitations can vary significantly case by case
Nova Scotia: 6 years / 20 years, and acknowledging a non-judgment debt can push that limit to 20 years as well
Prince Edward Island: 6 years / 10 years
Yukon: 6 years / 10 years, with limitation suspended in the case of creditor disability, but the maximum extension after disability ends is two years
Northwest Territories: 6 years / 10 years
Nunavut: 6 years / 10 years
If you acknowledge a debt in writing, that restarts the limitation period to that particular date. Even if you dispute a debt, in some provinces, that action alone can restart the limitation and count as acknowledgment. It is important to research the germane statute in each province to find out the exact terms under which you must operate.
What are the limits with respect to credit reporting?
Each province has laws in place with respect to the length of time that credit bureaus can retain information on a consumer’s credit report. The specific laws also indicate what a credit report can show, the parties to whom the bureaus can release the information, the procedure for managing disputes and validating information.
British Columbia: 6 years
Alberta: 6 years (judgments can only remain for six years unless the creditor confirms the debts)
Saskatchewan: 6 years
Manitoba: 6 years
Ontario: 7 years
Quebec: No specified period, although TransUnion and Equifax keep debts for six years, while TransUnion keeps judgments on the report for seven years
Newfoundland: 6 years, maximum of seven years for judgments
New Brunswick: No relevant provincial law, but the bureaus follow the same protocols that they do for Quebec
Nova Scotia: 6 years for judgments and seven years for bankruptcies, no limit for non-judgment debts, but both bureaus use the six-year period
Prince Edward Island: 7 years, with 10 years for judgments
Yukon: Same provisions as Quebec
Northwest Territories: Same provisions as Quebec
Nunavut: Same provisions as Quebec
In many cases where provincial law allows bureaus to report debts for longer than six years (seven years for judgments), TransUnion and Equifax have often followed those time frames. Understanding Your Credit Report and Credit Score, a publication of the Financial Consumer Agency of Canada, has more information about the policies of TransUnion and Equifax with respect to their reporting of Trade Items, Collections, Judgments, Registered Consumer Proposals, Secured Loans, Credit Counseling and Bankruptcies
What happens when a creditor writes off a debt?
If a company writes off accounts receivable, that does not affect that company’s ability to collect that debt going forward. Some small business owners believe that writing a debt off means they can no longer collect on it, but that is not true. Instead, that debt just no longer appears as income on a company’s balance sheet. Companies can go after the money, and if they end up recovering it, they can report it under a different category of income.
Is this good news?
Here’s the thing – just because creditors can no longer take you to court because a debt is so old, or just because your credit history no longer shows a particular debt, does not mean that you should go into hiding from your debts. If you have a number of bad debts on your credit report, your credit score has likely suffered as a result, so that means you have to spend a number of years with limitations on the ways in which you can access financing. Your opportunities to finance a home purchase or even an auto purchase may be extremely limited as a result.
An important takeaway from this is that it is important to live within your means. Whether your income is modest or lavish, there are opportunities that you have to go into debt, and the more debt you take on, the more precarious your leverage is from a financial perspective. It is possible to have a poor credit score even when you have an extremely high credit score, and just because you make six (or seven) figures does not mean that you should build up huge piles of debt. Over time, your income may decrease significantly, either through job loss or other significant events. It is better to save ahead for times of trouble than to hit them already maxed out on your debts.
Understanding how debt can influence your credit report – and the amount of time creditors have to go after you for the money – is important. However, wise financial habits can keep you from ever having to put this information to use.
If you are early during the limitation period and have significant equity in your property, it’s usually a good sense to clear some of these debts and get back on the right track. It is best to work with a broker that can leverage your time and explore your options with various traditional or semi-traditional lenders without multiple credit inquiries. If that avenue won’t work for you, a private lender may the solution for you. Contact Us so we can either direct you to a broker that can explore non-private lending options or secure you quick private money for a year or two before refinancing with a traditional lender.