In many, but not all, instances consumers who are struggling with debt problems can improve their situation by taking advantage of limitation periods.
A limitation period is a law that requires a creditor to sue a consumer within a certain period of time, otherwise it might be difficult for a creditor to recover any monies from a consumer. The rationale behind limitation periods is to bring some certainty to the marketplace and to force creditors who wish to sue someone over an unpaid account to do so within a certain length of time.
Limitation periods are only available for unsecured consumer debt
There are four different categories of debt which can be summarized as follows:
Secured debt: A secured debt is one where the creditor has some collateral in the event of non-payment of the debt. The most common examples of secured debt are the mortgage on a home and the lien on an automobile that has been financed.
Any debt which is not secured debt is unsecured debt because the creditor has no collateral. There are different categories of unsecured debt;
Unsecured consumer debt: An unsecured consumer debt originates from a consumer transaction. This includes debts arising because the consumer borrows money or receives goods or services;
Unsecured debt owing to the government: An unsecured government debt is one owed to the federal, provincial, or municipal government. The most common examples would be student loans and monies owing for income taxes.
Non-dischargeable debt: There are certain types of unsecured debts which are not discharged in a bankruptcy or in a consumer proposal. These include the following:
• Child support or spousal support;
• Government fines;
• Civil judgments arising from fraud;
A consumer can only take advantage of limitation periods in connection with unsecured consumer debt.
Starting the clock on a limitation period
It can be very helpful to think of a limitation period as a clock. A limitation period begins to run on the date of your last payment or the date when you have a legal obligation to make a payment.
Restarting the clock on a limitation period
There are two things that a consumer can do to restart the clock on a limitation period. The most common way that the clock on a limitation period is restarted is when a consumer makes a partial payment. Any partial payment made by the debtor prior to the expiry of a limitation period will restart the clock.
It is also possible for a consumer to restart the clock on a limitation period by making a written acknowledgement of the debt before the expiry of a limitation period.
The length of limitation periods in various provinces
The relevant limitation period is the limitation period for simple contract debt in the province in which you live. Limitation periods vary between 2 years and 6 years. The limitation period is only two years in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick. It is 3 years in Quebec, and six years in the rest of Canada.
The expiry of a limitation period gives a consumer an affirmative defence
When a limitation period expires with respect to a particular unpaid unsecured consumer account the debt does not disappear.
The expiry of a limitation period merely provides the consumer with an affirmative defence.
If a creditor were to sue a consumer after the expiry of a limitation period then the consumer would simply file a defence, pleading the expiry of the province’s limitation period as a full and complete defence, and the consumer would win.
As a practical matter, creditors rarely sue consumers on an unpaid unsecured consumer account after the expiry of a limitation period.
Taking advantage of a limitation period which has already expired
Some consumers might find themselves in a position where they have an unsecured consumer account on which the limitation period in their province has expired.
In this scenario the consumer can simply inform the creditor that the consumer will take advantage of the limitation period and will decline making any payments to the creditor. Alternatively, the consumer might choose to negotiate a very favourable one-time lump sum payment–for substantially less than the current outstanding balance.
Taking advantage of a limitation period at some future date
It is also possible for consumers to try and take advantage of a limitation period in circumstances where the consumer is currently making payments on some or all of his unsecured consumer accounts.
It is impossible to take advantage of a limitation period unless a consumer stops making payments to a creditor in connection with a particular unsecured consumer account.
In this scenario a consumer will need to cross his fingers and hope that his creditor will not sue him before the expiry of the limitation period in his province.
No one gets compensated for educating consumers about limitation periods
We have thousands of people employed in Canada providing services to consumers struggling with unsecured consumer debt.
Virtually none of these people would receive a penny in compensation for informing a consumer about the existence of limitation periods and how you can take advantage of limitation periods.
Consequently, I will sometimes refer to limitation periods as a debtor’s secret weapon.
Mark Silverthorn is a former collection lawyer and collection industry insider. He is the author of The Wolf At The Door: What To Do When Collection Agencies Come Calling, published by McClelland & Stewart. He is also the Founder of Comprehensive Debt Solutions Inc., a firm which assists consumers struggling with unsecured consumer debt. Its website is www.comprehensivedebtsolutions.ca.