Every Canadian should know the basics when it comes to financial literacy and that includes an understanding of limitation periods; what they are, what types of debts are covered, limitation periods in various provinces, and how to calculate the expiry of a limitation period.
Limitation periods place pressure on creditors who wish to sue you to do so within a particular period of time. After the expiration of this period it is much harder—and often impossible—for a creditor to collect monies from a debtor for an unpaid debt.
Limitation periods typically only apply to consumer transactions where the creditor is an unsecured creditor. A debtor is not able to take advantage of a limitation period for:
- Secured debts.
- Monies owing to the government including student loans
- Non-dischargeable debt which includes child support and spousal support obligations, fines, and civil judgments involving fraud.
Provincial limitation periods
Limitation periods vary from province to province and every few years a province will change its limitation period. Over the past twenty years the trend has been for provinces to reduce their limitation period from six years to two years.
From your perspective, the relevant limitation period is the one in the province or territory in which you currently live.
As of January 1, 2016, the limitation periods for consumer transactions is:
- two years in British Columbia, Alberta, Saskatchewan, Ontario, and New Brunswick;
- three years in Quebec; and
- six years in the rest of Canada.
A limitation period is like a stopwatch
It is very helpful to think of a limitation period like a clock or a stopwatch. If you owe money to your creditor for a debt then the limitation begins to run on the date of your last payment.
There are two things that a consumer can do to restart the clock on a limitation period if it has not yet expired:
- Firstly, the consumer can make a partial payment which serves to restart the clock. This makes sense because the partial payment results in a newer, more current date of last payment.
- Furthermore, if a consumer makes a written acknowledgement of a debt then this written acknowledgement will restart the clock on a limitation period.
Once a limitation period has expired, however, it remains expired. There are no actions that you can take that will reset the clock.
What are the consequences of the expiry of a limitation period?
Many Canadians are under the impression that a debt is extinguished—or magically disappears—upon the expiry of a limitation period. Nothing could be further from the truth.
It’s important to understand that even if the limitation period has expired you still owe the money to your creditor. What has changed is that now it becomes much tougher for your creditor—as a practical matter—to collect the debt, but the debt still exists.
Once the limitation period has expired the consumer has an “affirmative defense” which he can plead if his creditor were to sue him. If your creditor sues you after the expiry of a limitation period and you defend the lawsuit pleading the expiry of your province’s limitation period then you will be successful. If you, however, fail to defend the lawsuit—or fail to plead the expiry of your province’s limitation period in your defense—then your creditor might very well successfully sue you.
As noted earlier, your debt does not magically disappear when the limitation period has expired. That means that even if the limitation period has expired on your debt it does not necessarily prevent your creditor, or its authorized collection agent, from contacting you—in writing or by telephone—demanding payment of your outstanding account.
Taking advantage of a limitation period
It is possible that you might currently find yourself in no man’s land—where you have not made payments to one or more of your creditors for several months but the limitation period in your province has not yet expired. If you find yourself in this position one of your options is to wait and see whether or not any of your creditors are going to sue you.
If the limitation period on one of your debts has expired then you will be in a better bargaining position with your creditor should you wish to negotiate a settlement with your creditor. You could, for example make a one-time settlement offer to your creditor to settle by making a one-time lump sum payment of 20 cents on the dollar—with your offer to be revoked for eternity in 30 days. This can often be a very effective negotiating strategy.
You should consider speaking to a licensed insolvency trustee (bankruptcy trustee) before you start negotiating settlements because there might be a number of reasons why a consumer proposal is a more optimal solution. One of the disadvantages of settling your own debt is that you might be able to negotiate a great deal with one creditor only to find some of your other creditors will not offer favourable settlements. In many instances, a licensed insolvency trustee will be able to get you a better result by simply doing a consumer proposal. One of the advantages of doing a consumer proposal is that you can save money eliminating debts owing to the government including student loans provided you ceased attending school full time at least seven years ago.
The powerful combination of limitation periods and creditor’s reluctance to sue people
Limitation periods—simply on their own—can potentially be important to a Canadian struggling with unsecured consumer debt. Most Canadians, including most people providing advice to consumers struggling with consumer debt, fail to appreciate the importance of limitation periods combined with a patient “wait-and-see approach” to a person’s debt situation. Theoretically, a consumer might owe thousands of dollars in unsecured consumer debt and if they simply were to wait to see if they were sued before the expiry of a limitation period they might find themselves in a position where the limitation periods expired on all or most of their indebtedness. Sometimes a creditor’s ability to take action will depend upon what they know about your circumstances – whether you have any wages to garnishee for example or assets. That’s why talking to someone like a licensed insolvency trustee about your specific situation if you have significant unpaid debts is always a good idea.