Apr 28, 2026
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What would you do if a sudden windfall landed in your lap… but you were also drowning in debt? That's exactly the dilemma Dave Ramsey tackled on The Ramsey Show when a 21-year-old caller named Andrew rang in with a story the financial guru described as "the wildest thing I've ever heard (1)."
Andrew had just received a US$250,000 (C$345,000) insurance settlement — the result of being shot by a teenager who used a 3D-printed gun. He also carried US$70,000 (C$96,700) in debt. His plan for dealing with it? Wait it out.
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"I want to play the waiting game. I just want to let it fall off on its own," Andrew told Ramsey and cohost Dr. John Deloney.
Andrew was betting on the statute of limitations to eventually erase what he owed. But Ramsey and Deloney pushed back hard — and their advice applies the same way north of the border.
Why waiting it out is risky in Canada, too
In Canada, the idea of waiting for debt to "fall off" is a common misconception — and a potentially costly one. While provinces do have limitation periods that restrict how long a creditor can sue to collect a debt, those periods can be reset under specific circumstances.
In Ontario, the Limitations Act, 2002 sets the basic limitation period at two years from the date the creditor "discovered" the debt (2). British Columbia and Alberta also use two-year limits, while Manitoba, Saskatchewan and New Brunswick give creditors up to six years (3).
What's important to know is that the clock on that time period can restart under some conditions. If you make any payment on the debt, acknowledge it in writing, or — in some provinces — verbally admit to owing it, the limitation period resets. That means anyone who owes money and "waits it out" hoping it will go away could restart the timer by making a single phone call or a small payment.
Additionally, even after the limitation period passes, the debt doesn't simply disappear. Unsecured debt typically remains on your credit report for six years from the date of last activity (4). Collectors may still contact you — but they can't successfully sue to collect.
"Fall off? No, honey, you owe the money," Ramsey told Andrew. He and Deloney insisted that paying what you owe — even at a negotiated reduced amount — is the right move. Integrity matters, and practically speaking in Canada, there's a smarter way to handle overwhelming debt: debt settlement.
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How does debt settlement work?
Debt settlement is a process where you negotiate with your creditors to pay off a debt, often at a reduced lump sum. It tends to work best with unsecured debt, like credit cards, personal loans or lines of credit. Because these lenders have no collateral — like a home or vehicle — to fall back on, it gives the borrower some negotiating power.
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A few important caveats apply in Canada:
Secured debt — such as a mortgage or car loan — is harder to settle, because lenders can repossess the asset. They have less incentive to cut a deal.
Government debt — including Canada Revenue Agency (CRA) tax debt or Canada Student Loans — is generally not negotiable through standard settlement (5). However, Canadians struggling with student loan debt may be eligible for the federal Repayment Assistance Plan (RAP), which lowers monthly payments based on income (6).
Also, while the government doesn't outright "forgive" loans, it starts covering both interest and principal in "Stage 2" — after 60 months of RAP or 10 years after school — to ensure the balance reaches zero by the 15-year mark (6). Additionally, the Canada Student Loan Forgiveness Program provides up to $60,000 in forgiveness for eligible doctors and medical residents and up to $30,000 for eligible nurses who work in rural or remote underserved communities (7).
Further, the Canada Revenue Agency (CRA) may consider forgiven debt as taxable income. Under Section 80 of the Income Tax Act, forgiven commercial debt can reduce a debtor's tax attributes — and in some consumer debt situations, the CRA may treat the forgiven amount as income (8). If you're negotiating a significant debt settlement, consult a tax professional to help you sort this out first.
If you're struggling with high credit card debt or have outstanding payments on multiple cards, consider taking out a personal loan with Loans Canada. Personal loans typically have a lower interest rate than credit cards, which helps you save on interest payments. Plus, you only have one payment to keep track of when consolidating debt with a personal loan.
How to use debt settlement to clear up your finances
Ramsey's advice to Andrew was direct: call your lender, acknowledge the debt and ask them whether they'll accept a lower amount to settle it. For Canadians, the approach is the same. You may say something like: "According to my records, I owe $10,000 on this closed credit card account. I know I've fallen behind, but I do have some money available now. Would you accept $5,000 to settle this today?"
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If there's context to your situation, share it — briefly. If you lost your job or had a medical emergency, mention it. You're explaining, not making excuses. Here are a few key things to keep in mind:
Start with an amount lower than you're willing to pay
The creditor's goal is to recover as much from you as possible. If you have a windfall, don't be up front about it. Start your offer about 25% below what you can actually afford to pay, leaving yourself room to negotiate.
Ask for a debt validation notice
Before acknowledging the debt in detail, ask the collector to send a written notice of the debt. In Ontario, the Collection and Debt Settlement Services Act requires collection agencies to send written notice within five days of first contact, including the creditor's name, the amount owed and information about your right to dispute the debt (9).
Similar protections exist in other provinces. If you're dealing with a collection agency that can't prove what you owe, that's worth diving deeper with a licensed insolvency trustee or consumer credit counsellor before you pay anything.
Make sure you're talking to the right lender
If your original creditor has sold your account to a collections agency, you'll need to negotiate with the agency — not the bank or credit card company. Collections agencies often purchase debts for a fraction of their face value, which means there's potentially more room to negotiate a lower settlement amount.
Get everything in writing
A verbal agreement about debt owing or repayment means nothing. Before you make any payment, ask for a written settlement offer that confirms the amount, the account it applies to and confirmation that the remaining balance will be considered paid in full. Keep a copy.
The trade-offs of debt settlement
Debt settlement can be a powerful financial tool when you're unable to pay what you owe in full. But it comes with significant trade-offs:
- Your credit score will take a hit. A settled account is reported to credit bureaus as "settled for less than the full amount," which results in a strike on your score. However, it's still less damaging than an ongoing, unpaid collection.
- You may owe taxes on the forgiven amount. Check with a tax professional or the CRA before finalizing any settlement.
- It doesn't erase your financial history. Debt settlement stays on your credit report for six years from the date of the first delinquency, according to Consolidated Credit (10).
Still, for many Canadians drowning in unsecured debt — yet have the funds to settle — it may be best to start fresh. As Ramsey put it: write the cheque, close the chapter and move forward.
What Canadians can do next
If you're sitting on a windfall — or even modest savings — and still carrying debt you've been avoiding, here are some practical next steps to get back on your feet:
- Know your province's limitation period. Find out how long creditors have to sue you, and understand what can reset that clock. Contact a licensed insolvency trustee (LIT) or a nonprofit credit counselling agency for guidance.
- Check your credit report. Request a free credit report from Equifax Canada or TransUnion Canada to confirm what debts are listed in your name, and their status.
- Talk to a LIT before settling. In Canada, LITs are federally regulated and can provide free initial consultations. They can help you evaluate debt settlement, consumer proposals and bankruptcy.
- Understand the tax implications. Before agreeing to any forgiveness or settlement, speak with a tax professional about potential CRA obligations.
- If you have student loans, explore RAP. Contact the National Student Loans Service Centre (NSLSC) to ask about the Repayment Assistance Plan, which can reduce or eliminate your monthly payment based on your income.
- Get everything in writing — always. Never make a settlement payment without a written agreement that confirms the amount and states the debt will be considered paid in full.
Keep in mind that a low credit score because of ongoing debt will lessen your creditworthiness. If you're ignoring the debt hoping it will "go away," the strike on your credit score will affect your eligibility to get approved for a loan, including a mortgage. Paying off balances as they arrive is the best thing to keep your credit score in top shape.
-With files from Melanie Huddart
Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
YouTube (1); Government of Ontario (2, 9); Collection Agencies Canada (3); Hoyes and Michalos (4, 5); Government of Canada (6, 7, 8); Consolidated Credit Canada (10)
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Jessica Wong is a freelance writer based in Toronto, Ontario. Her work has appeared in numerous publications including STAY Magazine: Hotel Intelligence and re:porter magazine. With a background in economic development, entrepreneurship and small business consulting, she enjoys writing about topics that help Canadians learn more about personal finance.
