Lenders Take Note: Consultations Set to Begin on Ontario’s New Coerced Debt Legislation

To listen to an audio recording of this article, click here.

In December 2023, Ontario’s legislature unanimously passed Bill 41, the Protection from Coerced Debts Incurred in relation to Human Trafficking Act, 2023 – a significant piece of legislation aimed at cutting the financial ties binding human trafficking survivors to their abusers.^[1] Bill 41 prohibits creditors from knowingly collecting or attempting to collect on debts incurred as a result of human trafficking and bars any mention of such “coerced debts” on consumer credit reports. In effect, if a debt is officially determined to be a product of coercion by a trafficker, it must be expunged – erased from credit history and rendered uncollectible.

Despite receiving royal assent and becoming provincial law in December 2023, the law has yet to be proclaimed into force because the government has not yet brought forward the supporting regulations that would operationalize the process necessary for a debtor to seek the “coerced debt” protections set out in the bill. This may soon change.

In May 2025, the Ontario government announced it would proceed with consultations on regulations to support the long-awaited implementation of Bill 41.^[2] The forthcoming consultations will be an important opportunity for lenders to weigh in on the eventual process that would allow for the discharge of “coerced debts” outside of existing insolvency and debtor-relief mechanisms.

What does this mean in practice for lenders? The potential impact of this legislation on lenders is significant. Forgiving and forgetting a debt is easier said than done, especially when that debt was issued under ostensibly legitimate circumstances. A trafficker might have marched a victim into a branch to open a credit line – with all paperwork technically in order – leaving the bank with a loan that is valid on its face but is morally (and now legally) toxic. Ontario data suggests that at least one in four sex trafficking survivors has debt set up in their name by their abuser. That debt can be in excess of $100,000 per survivor.^[3]

As the province gears up for consultations on the implementation of Bill 41, some key details will be top of mind for lenders.

Financial Impact on Lenders

By prohibiting collection of “coerced debts,” Bill 41 essentially requires lenders to absorb the loss. While Canadian banks have generally been supportive of the legislation’s objectives, they will now need to account for these losses.^[4]

This represents a new species of credit risk. It’s not a default in the usual sense – the borrower isn’t failing to pay due to misfortune or bad faith, but due to state intervention which deems a debt to be illegitimate.

Determining What Debt Is ‘Coerced’

By design, Bill 41 requires input on a mechanism to decide which debts qualify as “coerced” (i.e., incurred as a result of the debtor being subjected to human trafficking). The statute contemplates that a definition will be specified in the regulations.

Another significant detail to be worked out in the forthcoming consultations is who will receive applications for relief under the coerced debt law. Section 21 of the legislation makes clear that the legislative intent of the bill is not to have applications for coerced debt relief brought before a traditional civil court.^[5] Instead, the legislation references the bringing of an “application” to a “prescribed individual or group of individuals” with such application to include a “letter from an organization” setting out the details of the victim’s claim.^[6]

Keeping these applications outside of the traditional court processes is seemingly desirable insofar as it minimizes the cost and expense associated with pursuing such relief while guarding against the re-traumatization of victims associated with a litigious approach. However, this approach also leaves the government with the tall task of establishing a body of “prescribed individuals” who will adjudicate such applications outside of the traditional civil courts.^[7]

How swiftly will determinations be made? What evidence will suffice – a police report, a conviction, an affidavit from a support agency? The law’s teeth exist, but the bite requires a careful alignment of procedure in the regulations.

Lenders will need to prepare to interface with whatever mechanism emerges, be it supplying documentation, pausing collections during review or accepting an official certificate that a debt is deemed coerced.

Risk of Fraudulent Claims

The existence of a new legal escape hatch for debts will inevitably raise an anxious question: could it be abused? To maintain integrity, the bar to prove that a debt is coerced will necessarily be high. The new regime’s longevity will depend on adequate safeguards to ensure that “coerced debt” status is granted only with credible substantiation.

Operational Adjustments and Training

Once implemented, lenders’ front-line staff and collections agents will need new protocols. For instance, if a distraught customer claims their debt was coerced by an abuser, employees will need to know how to respond. Privacy issues are also inherent in handling such claims, and lenders will need to consider internal guidelines to limit access to case details and other potential liabilities.

There is also the matter of credit bureau updates. Normally, a default stays on file for years. Under the new law, credit bureaus must wipe the slate clean for coerced debts, which must not be considered by lenders when determining whether to offer credit products and services. This will require new reporting codes or processes to blot out debts that are found to be coerced and potentially leave other lenders vulnerable. There are no magic remedies.

New Statutory Claim for Creditors Teased

The Ontario government has suggested, through its legislative backgrounder, that the province will consider introducing a novel statutory claim to allow creditors to sue traffickers to recover a coerced debt.^[8] In the event that Bill 41 is implemented and creditors are obliged to discharge debts deemed to be “coerced,” a novel statutory claim could provide recourse to lenders who lose the ability to enforce against the victim.

Impact in Bankruptcy

Another lingering question is how the new provisions will operate in a bankruptcy scenario. Will a trustee in bankruptcy be able to bring an application through the specified procedure for a debt to be deemed a “coerced debt,” or will the ability to bring such applications remain solely with the debtor? While this question may be settled by the forthcoming regulations, existing case law supports the principle that causes of action arising from bodily or mental suffering remain with the bankrupt and do not vest in the trustee.^[9]

Jurisdiction and Consistency

The protections contemplated by Bill 41 are not novel in our legal tradition. Equitable doctrines at common law have long afforded protection against obligations incurred through duress, undue influence or unconscionable terms. In Lloyds Bank v. Bundy,^[10] Lord Denning drew together these strands of doctrine, observing that courts may set aside contracts or transfers of property where fairness so demands. As he put it, English law provides relief to those who, without the benefit of independent advice, enter into agreements on grossly unfair terms – particularly where their bargaining power is severely impaired and compounded by undue influence or pressure exerted by or on behalf of the other party.^[11] While such equitable defences are available for debtors and guarantors to raise in virtually any contractual relationship, Bill 41 mandates a new and dedicated application process to be established for the deletion of debts incurred specifically as a result of the debtor being subjected to human trafficking.^[12]

Here, the emphasis is not on whether the debtor had meaningful opportunity to understand the bargain, but on whether the debt itself is the fruit of human trafficking. The statutory regime raises constitutional questions. Human trafficking is a criminal offence already prohibited under the Criminal Code.^[13] Establishing a new provincial administrative body or tribunal to determine whether trafficking underlies an applicant’s indebtedness may involve a level of inquiry that, depending on its scope, could be challenged as ultra vires the province’s jurisdiction.

Another practical wrinkle is that Bill 41 is provincial law, yet banking falls under the jurisdiction of federal Parliament. Ontario’s law would protect those in Ontario from collection of trafficker-linked debt, but other provinces have no equivalent law as of yet.^[14]

Some association and victim support groups are already advocating for nationwide adoption of similar protections, which would eliminate inconsistencies in enforcement across jurisdictions.^[15] Until then, however, lenders must navigate a potential patchwork of rules. In practice, major lenders may consider adopting a uniform policy nationally.

Next Steps

The Ontario government is now expected to initiate consultations to support Bill 41’s implementation, bringing financial institutions, victim advocates and regulators together to hash out the mechanics.

It will be up to lenders to seize the opportunity to shape regulations that are clear, fair and operationally practical for their businesses. If implemented correctly, this legislative change may prove significant in helping to remove a lasting vestige of crime from a victim’s story.

The Financial Services Group at Aird & Berlis LLP will continue to monitor for developments in regard to this legislation. Please reach out to the authors or a member of the group for more information.

[1] Bill 41, Protection from Coerced Debts Incurred in relation to Human Trafficking Act, 2023 - Legislative Assembly of Ontario.