What is Debt Forgiveness?

What is debt forgiveness in Canada?

Debt forgiveness is when a creditor agrees to cancel all or part of your debt, usually because you can’t afford to repay it.

If you’re in severe financial hardship and can’t even make the minimum repayments, some lenders eventually decide it’s not worth chasing and write off the debt as a loss. This is especially true if you have no income or assets.

But creditors won’t write off debt unless you take action and show you genuinely can’t pay.

What debts can be forgiven?

Most unsecured debts can be forgiven, including credit card debt, personal loans, lines of credit, payday loans, and some tax debts.

Secured debts, such as mortgages and auto loans, usually don’t qualify for debt forgiveness. These debts are tied to an asset, so if you stop paying, the lender can take the property. Some secured debts can qualify for modification if you’re struggling to keep up with mortgage payments or vehicle financing.

Student loans can only be forgiven through a consumer proposal or bankruptcy if you’ve been out of school for at least 7 years.

Source: Bankruptcy and Insolvency Act, Section 178

Is there really a debt forgiveness program?

If you’re worried about mounting debt and wondering how to reduce what you owe, chances are you’ve seen ads shouting about “government debt relief,” “government grants,” or promises of “debt forgiveness” that sound too good to be true.

In Canada, there are no official government-backed debt-forgiveness programs, nor is there a government grant that simply clears your debt.

Debt forgiveness typically happens through one of two formal debt relief options: a consumer proposal or bankruptcy.

A consumer proposal and bankruptcy offer debt forgiveness. Both are legally binding options administered by a Licensed Insolvency Trustee (LIT), a regulated insolvency professional licensed by the federal government.

They’ll handle the negotiations for you, often reducing what you owe or arranging more affordable repayments.

Not everyone qualifies, and not all debts are eligible. Eligibility criteria for debt forgiveness in Canada depend on your level of financial hardship and your ability to negotiate with creditors.

If you’re unsure where you stand, a Licensed Insolvency Trustee can assess your situation. Most offer free consultations.

What debt forgiveness programs are available in Canada?

The main debt forgiveness options in Canada are consumer proposals and bankruptcy. Both are legal programs that can significantly reduce the amount you pay back.

Other options, such as debt management plans or consolidation loans, can make payments easier, but they don’t forgive any of the debt.

Program	Provided by	Debts covered	Debt forgiven?	Duration
Consumer Proposal	Licensed Insolvency Trustee	Most debts	Yes	1-5 years
Bankruptcy	Licensed Insolvency Trustee	Most debts	Yes	9-21 months (longer with income)
Debt Settlement	Debt settlement company	Most debts	Not typical	2-5 years

1. Consumer proposal

A consumer proposal is a formal, legally binding agreement between you and your creditors. It’s arranged with the help of a Licensed Insolvency Trustee. It is a government-legislated debt relief program.

You repay a portion of your unsecured debt, often reducing what you owe by up to 80%, through fixed monthly payments for up to five years.

If you stick to the repayment plan, interest is frozen, collection calls stop, and you’re legally protected from creditor action. No more wage garnishment or calls from a collection agency.

Any remaining eligible debt at the end of the proposal is forgiven, giving you a clean break, without going bankrupt.

Unlike bankruptcy, you keep your assets in a consumer proposal. There’s no requirement to give up valuables like your home or car.

They’re often marketed as “government debt forgiveness programs” because they’re federally regulated and can be arranged only through a Licensed Insolvency Trustee. They’re backed by the Bankruptcy and Insolvency Act, making them legally binding and enforceable.

Most unsecured debts qualify for a consumer proposal. Student loans qualify only if you’ve been out of school for 7 years or more, and CRA debt can be included if your returns are filed and accepted.

A consumer proposal will affect your credit rating. It remains on your credit report for at least three years after completion, which can make borrowing more difficult in the short term.

2. Bankruptcy

Filing for bankruptcy is a last resort to eliminate your debts.

It’s a legal process in which you surrender non-exempt assets to a Licensed Insolvency Trustee, who uses the proceeds to pay creditors. In return, most of your unsecured debts are forgiven.

If you qualify, you’ll face restrictions for 9–21 months. Upon completion, your unsecured debts are officially discharged.

It may be the right choice if your financial situation is severe. However, declaring bankruptcy is a legal process with serious consequences, including the possible loss of assets. Your credit score will also take a major hit, affecting your future ability to borrow money.

Not all debts are forgiven. For example, student loan debt cannot be included unless it’s been at least seven years since you left school.

3. Debt settlement

Debt settlement involves negotiating with your creditors to settle your debt for less than the full amount owed. You typically offer a lump-sum payment, and if they accept, the remaining balance is forgiven.

You don’t need a debt settlement company. You can contact creditors directly, but get any agreement in writing before handing over any money.

Creditors usually only entertain offers if you’ve already had missed payments and they believe you’re unlikely to repay in full.

While it can lead to partial forgiveness, creditors are not required to accept your offer.

Debt settlement is an informal arrangement with no legal protection. Creditors can still sue you, garnish wages, or continue collection efforts until a deal is reached.

Be especially cautious of debt settlement companies that charge high upfront fees or promise to erase your debt quickly. Many don’t deliver, and scams are sadly common. Make sure you fully understand the fees charged by debt settlement companies before agreeing to anything.

Keep in mind that forgiven debt may be treated as taxable income. If a creditor forgives more than $500, they may issue a T4A slip, and you could owe tax on the amount that was written off.

If you’re considering a debt settlement program, be aware that it’s not always the safest option and isn’t a legally binding debt-forgiveness program.

Speak to a Licensed Insolvency Trustee first. They can walk you through better, more reliable options, and the consultation is free.

Can student loans be forgiven in Canada?

Student loan forgiveness is available in certain circumstances, but it’s treated slightly differently from regular debt forgiveness.

1. Repayment Assistance Plan (RAP)

If your income is under $40,000, you may not need to make payments. The government can cover interest and, in time, forgive the rest.

You can apply every 6 months through the NSLSC.

2. Federal forgiveness for doctors and nurses

If you are an eligible medical professional who works in underserved rural or remote areas, you may qualify for federal student loan forgiveness.

Doctors can apply for up to $60,000 in student loan debt to be forgiven over five years.

Nurses may be eligible for up to $30,000 in forgiveness, provided they complete at least 400 hours of in-person service each year.

Federal student loan forgiveness programs have strict eligibility criteria, so check the requirements carefully before making any career decisions based on them.

Source: Government of Canada – Canada Student Loan Forgiveness

3. Provincial Programs

Under the B.C. Loan Forgiveness Program, you could have the provincial portion of your Canada-B.C. integrated student loan debt forgiven at a rate of up to 20% per year for a maximum of five years. You’ll need to work in an eligible job to qualify.

Quebec’s Loan Remission Program forgives 15% of your student loan if you finish your program within a set time and receive a bursary each year through the Loans and Bursaries Program.

The Nova Scotia Student Loan Forgiveness Program can wipe out the provincial portion of your student loan, up to $20,400 over five years. You must have graduated, and your loan must have been issued on or after August 1, 2015.

If you studied in Prince Edward Island and borrowed more than $6,000 in student loans each year, you may qualify for the PEI Debt Reduction Grant Program. Depending on when you began your program, you could get $2,000 to $3,500 per year to reduce what you owe.

4. Consumer Proposal or Bankruptcy

Student loans can be discharged through a consumer proposal or bankruptcy, but only if you’ve been out of school for 7 years or more. Otherwise, you will remain responsible for repayment.

Does debt forgiveness hurt your credit score?

Debt forgiveness will almost always affect your credit score, but if you’re already behind, your credit’s likely already taken a hit.

Your credit can drop substantially if you’ve had missed payments. By the time you file a consumer proposal or bankruptcy, the damage may already be done.

Getting back in control is often worth the trade-off for your long-term financial health, and you can rebuild your credit over time.

How long do debt relief programs stay on a credit report?

Program	Impact on credit	How long does it stay on a credit report
Debt Settlement	R7	2 years after the debts have been repaid
Consumer Proposal	R7	Equifax: 3 years after completion or 6 years from the filing date (whichever comes first). TransUnion: 3 years after completion or 6 years from default.
Bankruptcy	R9	First-time: 6 years after discharge (7 years in NL, ON, QC and PEI with TransUnion). Second-time: Remains on file for 14 years with both credit bureaus.

What do those credit ratings mean?

Canadian credit bureaus use a two-part code: a letter for the account type and a number for the payment status.

The letter tells you what kind of account it is:

• R = Revolving credit (credit cards, store cards)
• I = Installment credit (personal loans, car loans)
• O = Open account (some lines of credit)
• C = Line of credit
• M = Mortgage

The number tells you how you’re paying:

• 1 = Paying on time
• 7 = Making payments through a special arrangement (consumer proposal, debt management plan)
• 9 = Bad debt, sent to collections, or bankruptcy

So R7 means a credit card included in a consumer proposal. I9 represents a personal loan included in a bankruptcy. Each account in your proposal gets its own rating based on how it was initially classified.

Only unsecured debts included in a consumer proposal receive the “7” rating. Secured debts like mortgages and car loans aren’t part of the proposal, so they keep their normal rating based on whether you’re making payments.

Source: Equifax Consumer Credit Report User Guide

Alternatives to debt forgiveness

These options don’t forgive your debt as a consumer proposal or bankruptcy does, but they can help you save money on interest and pay off your debt faster.

1. Ask for a lower interest rate

Before looking at formal programs, try calling your creditors directly and asking for a lower interest rate. It won’t reduce your outstanding debt, but it can make monthly payments more manageable and help you pay off the balance faster.

Creditors don’t have to agree, but many will if you’ve been a reliable customer or if you explain you’re struggling. It costs nothing to ask.

2. Credit card balance transfer

If your credit score is healthy (650 or above), a balance transfer credit card could give you some breathing space.

It lets you move high-interest credit card debt onto a new card with 0% or low interest for 6–12 months. That means more of your money goes toward paying off the debt rather than interest.

Don’t spend on the card and focus on paying down the balance. Watch for transfer fees, which are typically 1–3%, and clear as much debt as you can before the promotional period ends.

Also, avoid running up your old credit card again, or you could end up in a worse position. Always check when the promo rate ends, or you could get stung by higher interest later.

3. Debt Management Program via non-profit credit counselling

A Debt Management Program (DMP) can make debt more manageable, but it’s not a debt forgiveness program.

You’re still expected to repay the full amount you owe, just in a more structured and affordable way.

You offer a payment plan to your creditors, letting you pay off your debt in monthly installments you can afford.

Set up through a non-profit credit counselling agency, a DMP combines your unsecured debts (like credit cards) into a single monthly payment. Interest is often reduced or frozen, which helps stop your debt balances from spiralling further. Most plans run for up to five years.

Credit counselling agencies can also help with budgeting and financial planning beyond just debt repayment.

Creditors rarely offer debt forgiveness in a DMP. Some creditors may agree to write off a portion of the debt, but this isn’t guaranteed.

Creditors will often agree to freeze interest and charges, making it easier to repay what you owe.

As with most debt relief programs, a Debt Management Program will affect your credit score. It’s reported as an R7 or I7, meaning you’re repaying through a special arrangement. But as you pay down your debt, your score will start to recover.

4. Debt consolidation loan

A debt consolidation loan isn’t a debt-forgiveness scheme, as it won’t reduce what you owe. Its big advantage is that it can simplify payments and make it easier to manage multiple debts.

You take out a single loan to pay off all your existing debts, leaving you with one monthly payment, often at a lower interest rate.

That money is then distributed amongst all your creditors, streamlining the debt repayment process.

It doesn’t forgive your debt, but it can simplify debt management and help you avoid missed payments or defaults.

Just be sure you can afford the new loan and avoid racking up new debt on cards you’ve cleared.

Debt consolidation may cause a small dip in your credit score at first, but if you make your payments on time, it can improve your score over time.

5. Orderly Payment of Debts (OPD)

A court-approved plan that lets you repay debts over 5 years at a fixed interest rate. You repay the full amount, but it’s more manageable. Only available in Alberta, Saskatchewan, Nova Scotia and Prince Edward Island.

Are there tax debt forgiveness options?

Yes, but not in the way most people think.

The CRA won’t just reduce your tax debt, but they will cancel penalties and interest if you’ve experienced serious hardship like illness or job loss. That’s done through taxpayer relief provisions.

If you can’t afford to pay the tax, your best option is a consumer proposal or bankruptcy. These are legal processes that can reduce or clear tax debt, but only if all your tax returns are filed.

If you’re feeling stuck, speak to a Licensed Insolvency Trustee. They’re the only ones who can make a formal offer to the CRA to settle what you owe.

When does a debt become forgiven?

A debt is forgiven when the creditor formally agrees to write off some or all of what you owe.

In legal programs like a consumer proposal or bankruptcy, debts are forgiven once you finish the terms.

• Consumer proposal: Debt is typically cleared after 1–5 years of payments.
• Bankruptcy: First-time filers are discharged after 9–21 months.

In informal cases, debt may be considered forgiven if the creditor accepts a settlement, stops chasing it, and marks it as written off. There’s no fixed timeline for that.

How do I know if my debt has been forgiven?

It’s often unclear if a debt has been forgiven, so you’ll need to confirm it directly.

If your creditor agrees to write off your debt, ask for it in writing. Until you get official confirmation, the debt may still be active.

If your debt has been forgiven, your lender may send a notice confirming that you no longer owe anything.

Check your credit reports with Equifax and TransUnion to see whether the account is listed as “written off” or “settled.”

What if creditors are still contacting me over a forgiven debt?

If a debt has been legally forgiven through a consumer proposal or bankruptcy, creditors shouldn’t be contacting you.

Make sure the debt was included in your proposal or bankruptcy filing, and that you’ve completed your payments. Then ask the creditor for a letter confirming it’s been cleared.

If creditors persist, tell them the debt’s been settled and ask them to stop. If they don’t, report it to the Financial Consumer Agency of Canada or speak to your Licensed Insolvency Trustee.

How can I be forgiven of debt?

Debt forgiveness is not a magic wand, but there are legal ways to reduce or write off what you owe if you’re struggling to keep up.

Our Licensed Insolvency Trustees help Canadians find the right debt relief option, whether that means paying back what you can afford or legally writing off what you can’t.

If you’re looking into debt forgiveness or want to know your options, call us today at 587-701-5681 for a free consultation.