What is the Statute of Limitations on Debt?

Understanding the Statute of Limitations on Debt in Canada

A statute of limitations refers to the legal timeframe within which a creditor can initiate legal proceedings against a debtor. This legal concept is not only applicable in criminal law, but also in the debt collection process.

But what does it mean when we say a debt has expired? Let’s delve into the intricacies of the statute of limitations on debt in Canada to understand how it operates.

Decoding the Statute of Limitations on Debt

Collection agencies are infamous for their aggressive tactics to recover debts, often involving the threat of legal action. But what does this threat entail? Can a debtor be imprisoned or arrested for non-payment of debt in Canada?

The answer is a resounding “no”. Nonetheless, within a certain timeframe, which varies from one province to another, a collection agency can sue a debtor in court. This is where the statute of limitations on debt comes into play in Canada, protecting consumers from sudden claims over debts they may have forgotten about. If a debtor hasn’t acknowledged or made a payment toward a debt for between 2-6 years, depending on the province, and if the creditor hasn’t initiated legal action, the creditor’s opportunity to do so will have expired:

Statute of Limitation

2 Years : Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Saskatchewan
3 Years : Quebec
6 Years : Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Yukon

Implications of a Court Case Over Debt

If a debtor stops making payments, the creditor or collection agency can sue for the money owed. The court will take into account various factors like the age and amount of the debt, the debtor’s income, and the debtor’s assets. If the court issues a judgment in favor of the creditor, the creditor can recover the debt in several ways:

 

  • Implementing a payment plan.
  • Offering a partial settlement where the debtor pays a percentage of the debt.
  • Garnishing the debtor’s wages.
  • Seizing funds from the debtor’s bank account.
  • Placing a lien on the debtor’s property.

 

A Licensed Insolvency Trustee can guide a debtor through the various debt relief options and negotiate with creditors. However, a clear understanding of how the statute of limitations on debt in Canada works can spare a debtor significant challenges.

Creditor Suing After The Statute of Limitations

Even if the timeframe for legal action has lapsed, a creditor or collection agency may still attempt to sue a debtor. In such a situation, the debtor should file a defense with the court and make sure to appear on the trial date.

Statute of Limitations on Tax Debt

It’s crucial to understand that the statute of limitations on tax debt differs from that of unsecured debts such as personal loans or credit card debts. Tax debt owed to the CRA in Canada has a limitation period of either six or 10 years, depending on the type of tax.

Government debts like student loans fall under the federal limitation of six years.

What Resets the Statute of Limitations on Debt?

The limitation period is measured from the last acknowledgement or payment of the debt and can reset if the debtor:

 

  • Makes or promises to make a payment (or partial payment).
  • Enters into a payment/settlement plan.
  • Incurs a new charge on the account.
  • Admits the debt in any written or recorded acknowledgement.

 

Debtors relying on the statute of limitations to expire can still communicate with debt collectors. However, they should be careful not to acknowledge the debt as it may restart the clock.

How Long Can Debt Collectors Pursue a Debt in Canada?

Despite the statute of limitations, a collection agency can pursue a debt until it’s cleared. However, after a certain period, they cannot sue the debtor.

While there’s no legal obligation for debt collectors to stop pursuing a debt, they might give up on old debts that are too small or if they realize the debtor lacks the assets or income to repay. If they persist in contacting the debtor, it’s important to remember that the debtor has rights. They can only be contacted once a day and cannot be threatened, intimidated, or harassed.

Provincial Differences in the Statute of Limitations

Statute of Limitations on Debt in Ontario

Suppose a debtor in Ontario has a credit card debt of $7,000 and suddenly becomes unable to pay due to unforeseen emergency repairs. Two years after the first missed payment, the creditor cannot sue, but they can still send collectors.

Statute of Limitations on Debt in BC

Consider a debtor in British Columbia who has taken a $30,000 car loan. They’ve made four payments but are now struggling. If they continue to make partial payments, the statute of limitations will never expire. However, after two years of non-payment, the creditors cannot sue, but they could use the car as collateral.

Statute of Limitations on Debt in Alberta

Imagine a debtor in Alberta with a federal student loan of $10,000. They can’t make payments due to car repair expenses. Although the provincial statute of limitations is two years, for a federal debt like this, the debtor will need to wait the full six years.

Statute of Limitations on Debt in Quebec

If a debtor in Quebec has taken a small personal loan of $500 and hasn’t repaid it yet, it’s beneficial to refrain from acknowledging the debt until the province’s unique three-year statute of limitations has passed. This approach can prevent legal action.

Does Debt Expire If Not Paid?

Contrary to popular belief, debt does not expire after seven years. This misconception arises from the fact that most negative information is removed from a debtor’s credit report seven years after an incident.

In reality, a missed payment on debt will disappear from a credit report after six years, but it doesn’t affect the obligation to pay. Despite the statute of limitations, a creditor or debt collector can continue to contact a debtor because, legally, the debt is still owed.

Can a Debt be too Old to Collect?

A creditor can write off an outstanding debt to balance their books. While this may lower the debt’s priority, they can still pursue it or hand it over to a collection agency.

The only surefire way to permanently eliminate a debt is by paying it off.

If you’re grappling with unpaid debts, the best course of action is to seek advice from a debt professional, like a Licensed Insolvency Trustee (LIT). Consulting an LIT will not re-activate any old debts and will help you understand your financial responsibilities better.

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