Do unpaid debts ever disappear?

Credit bureaus usually stop keeping track of delinquent amounts after six to seven years. But old debts can suddenly reappear on your credit report.
Credit bureaus usually stop keeping track of delinquent amounts after six to seven years. But old debts can suddenly reappear on your credit report. Jonathan Hayward/CP

The belief that your creditors will eventually disappear in a puff of white smoke if you ignore them for long enough is unsurprisingly common in a nation beset by crippling household debt.

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But does debt, in fact, ever disappear on its own?

The urban legend that debt expires after a few years is rooted in a kernel of truth. There is such a thing as a statute of limitations on debt, and old debts do generally drop off your credit record.

Still, debt doesn’t actually ever disappear. If you have unpaid liabilities, you’ll continue to owe money for the rest of your life — and sometimes beyond that.

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Statute of limitations

Canadian legislation sets a statute of limitations on unsecured debt. This prevents creditors or a collection agency from taking debtors to court after a certain amount of time has elapsed. The clock starts ticking from the time you last made a payment on the debt, with the number of years varying across provinces and territories as follows:

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  • British Columbia = 2 years
  • Alberta = 2 years
  • Saskatchewan = 2 years
  • Manitoba = 6 years
  • Ontario = 2 years
  • Quebec = 3 years
  • New Brunswick = 2 years
  • Nova Scotia = 6 years
  • Prince Edward Island = 6 years
  • Newfoundland and Labrador = 6 years
  • The territories = 6 years

Not being able to take legal action means your creditors won’t have the means to seize your wages — but not much more, said David Gowling, senior vice-president with MNP Debt, one of Canada’s largest personal insolvency practices.

Debt collections agencies won’t stop harassing you and might even continue to threaten to sue you, confident that most debtors won’t know the law well enough to recognize that the threat is empty, said Gowling.

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If you are familiar with statutes of limitations and know your term is up, you could theoretically use that as leverage to reach a debt settlement. In practice, however, that almost never happens.

In over 10 years of practice, Gowling has only seen one such case. It involved an individual with an intimate knowledge of the law who was able to reduce his debt load after two months of research work and haggling, something most distressed borrowers wouldn’t be able to replicate.

Creditors aren’t very likely to take debtors to court, anyways, as that can be a costly and drawn-out process, said Gowling.

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And the term limits only apply to unsecured debts like some lines of credit and credit cards. Taxes, student loans, child and spousal support and debt backed by property — such as mortgages and home equity loans — are excluded.

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When your debt disappears from your credit record

Debt does eventually disappear from your credit history, in most cases. Equifax and TransUnion only keep record of delinquent amounts for six to seven years from the last payment or default date, according to Canada.

However, nothing prevents a collection agency from digging up forgotten debt and reporting them to the credit bureaus again, said Gowling.

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Around two years ago, he saw a case in which a company started demanding payment for an Eaton’s card. (Eaton’s, the famous Canadian retailer, went bankrupt in 1999.)

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What happens to your debt when you die

Debt doesn’t necessarily disappear when you die, either.

The good news is that only you are responsible for unsecured debt in your name: Your spouse and children don’t have to carry your unpaid credit card balance.

Unsecured creditors typically write off that debt as a loss when you die (although you should check on this with your creditors as policies may vary).

However, your partner or spouse will be responsible for picking up the balance left on any joint accounts, according to financial products comparisons site

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The bad news is that debts to the government — such as taxes — and debt secured by property — such as mortgages, home equity loans and car loans — do not go away.

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If you die owing money to the Canada Revenue Agency, it can stake a claim to your estate, which will likely reduce the amount of inheritance available to your survivors.

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And if you pass away with an outstanding balance on your mortgage or car loan, the debt remains attached to that property. Your family will likely have to pick up the tab or sell off the assets.

Mortgage insurance and term life insurance, however, will generally cover outstanding liabilities on your home, notes.

Thankfully, no one can come after your RRSP and TFSA savings, which will go to your designated beneficiaries, with no obligation for them to pay your debts.

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