Student debt is a concerning issue for many Canadians. Many students have had to take out larger debt loads in order to pay for their tuition. In fact, according to Statistics Canada, the average debt owed by Bachelor students at graduation was $28,000.
While many Canadians are able to successfully pay off their student loans, some struggle to make any strides. In some extreme cases, some former students are looking at bankruptcy to solve their debt problems.
The question is, should bankruptcy be sought as a means of alleviating student debt?
Bankruptcy For Student Loans In Canada: Can It Eliminate Student Debt?
The Bankruptcy Insolvency Act (BIA) was established to give Canadians a way to seek relief from their debts. Usually, bankruptcy is used to alleviate debt such as credit card debt, personal loans, and lines of credit.
But now, student loans are getting special treatment under the Act. Years before, student loans were treated like the average unsecured debt. However, current legislation has required that consumers must be out of school for a certain amount of time to be able to include their student debt in bankruptcy filings.
- 7 years and more. If you’ve been out of school for over 7 years, your student loan debt may be discharged under the Bankruptcy Act. That is if you file for bankruptcy or if you file a consumer proposal to your creditors.
- Less than 7 years. If it’s been less than 7 years since you attended a post-secondary education institution, your student loan won’t be automatically discharged through bankruptcy.
What Is The “7-Years” Waiting Period?
The “7-year rule” refers to the length of time that a person must be out of school before student loans can be eliminated by bankruptcy. When you file for bankruptcy, at least 7 years must have gone by since the official date of the end of your studies. This date refers to the last day you were registered as a student, not the last day you went to class.
How To Find Out Your End Of Study Date?
The BIA specifically excludes student loans if that 7-year waiting period has not yet passed. To find out what your exact end-of-study date is, you can get in touch with the National Student Loan Centre.
Once you find out what your end-of-study date is, simply add 7 years to that date and that is when your student loan may be handled through bankruptcy.
Can Your Student Debt Be Discharged Through Bankruptcy If It’s Less Than 7 Years Old?
Generally speaking, you can only get discharged from bankruptcy if it’s been at least 7 years since you stopped being a full or part-time student. If it’s been 5 or more years, you can apply for an early discharge with the court under the “hardship provision”.
Bankruptcy For Student Loans In Canada: Hardship Provision
To have your student loan debt discharged under Canada’s hardship provision, you must provide the bankruptcy court with satisfactory proof that you:
- Are going through financial difficulties that will prevent you from repaying your debts on time, now and for the foreseeable future.
- Legitimately attempted to fulfill your student debt obligations
When evaluating you for an early discharge, the courts will want to know whether you acted in “good faith” concerning your student loan payments. So, they’ll also look at the:
- Ways that you used your student loan funds
- Level of effort that you put toward your studies
- Repayment assistance programs you tried prior to bankruptcy
Can I Convert My Government Student Loan To A Regular Loan?
Yes, you could take out a new loan to help you consolidate your student loans. However, consolidating government student loans with a personal loan means your government student loan would cease being a student loan.
This means converting a government student loan will also cancel out any student tax benefits it has. For example, the interest on certain student loans is a non-refundable tax credit. Similarly, the interest rates on a government student loan are often very low and you’d be hard-pressed to find a rate lower than that with a regular loan.
Is Bankruptcy For Private Student Loans A Good Option?
If your student debt is a product from a private lender, it can qualify for automatic discharge under the Bankruptcy and Insolvency Act, regardless of how old it is. This rule applies to many consumer debts, as well as student loans that are not guaranteed by the government of Ontario or Canada.
Basically, private student loans are treated like any other unsecured debt during bankruptcy, meaning they can become eligible for discharge with zero waiting period.
Alternative Options To Bankruptcy For Student Loans In Canada
If your student loan is less than 7 years old, don’t worry. You may still have options that can help make your student loan debt more manageable, including but not limited to:
Repayment Assistance Plan
If you’re starting to build up an unhealthy amount of student debt, go to your student loans office immediately and negotiate a different payment plan. For instance, The National Student Loan Service Centre offers repayment assistance through the RAP.
The Repayment Assistance Plan (RAP) is a federal program that provides debt relief for students who are experiencing financial difficulties. Qualified students can be eligible for reduced payments or no payments at all.
If you qualify, the Government of Canada will also:
- Pay any interest that you owe on your unpaid student loan balance (that your reduced payments don’t cover)
- Begin to pay down the loan’s principal and interest, after 60 months of RAP payments or after 10 years of finishing school.
Student Debt Consolidation
As mentioned, affordable debt consolidation loans are rarely available for government student loans due to their competitive rates. However, it can be a good option for some private student debts, like lines of credit and personal loans. However, if you can’t cover your original student loan, most lenders will assume the same of any debt consolidation loan they offer you. So you may need to add a cosigner to help you qualify.
Dealing With Other Debts On Top Of Your Student Loans
While your government student debts might not be included under the BIA and cannot be discharged before the 7-year waiting period has expired, you can still deal with other debts under the act before that time is up. Student loans can be part of your overall debt problem. Many Canadians struggle with mounting debt from different sources aside from student loans. This may include credit card debt, personal loan debt, and so forth.
If you have other major debts, bankruptcy can still be a viable option for you, even if you haven’t yet met the waiting period. Filing for personal bankruptcy can help you deal with other debts to make paying back your student loan more feasible.
Final Thoughts On Bankruptcy For Student Loans In Canada
Dealing with a lot of student debt can be incredibly stressful, especially with all of life’s other financial obligations. If you are struggling to pay off your student debt, contact a Licensed Insolvency Trustee. These experts will be able to help you navigate all your options and decide which one works best for you.