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Get Student Debt Relief
If you are looking for relief from student loan debt, a bankruptcy or consumer proposal can eliminate certain student debt. Student debt can be included in a bankruptcy or consumer proposal depending on how old your student loans are, whether your student debts are a private student loan with a bank or are government guaranteed student loans, and what your budget can afford. Our licensed insolvency trustees can help you review the pros and costs of each student debt relief option and decide which will work for you. Here is some information you may want to talk about.
Student Loan Debt and Bankruptcy Law in Canada
In Canada, student loans are subject to special treatment under the Bankruptcy & Insolvency Act. While bankruptcy eliminates most unsecured debt, like credit card debt, there are special laws governing government guaranteed student loan discharge in bankruptcy or consumer proposal (for example OSAP loans).
Seven Year Rule or Waiting Period
Section 178 (1) of the Bankruptcy & Insolvency Act in Canada specifically excludes government guaranteed student loans if you have been a full or part-time student any time in the past seven years. To put it simply, if you have been out of school for more than seven years your student loan debt will be eliminated if:
- you declare personal bankruptcy or
- if you make a debt proposal to your creditors through a consumer proposal.
If it has been less than seven years since you were a student, your government guaranteed student loan will not be automatically discharged through a bankruptcy or a consumer proposal.
Overwhelming student loan debt is a growing financial crisis. In Canada student debt can be forgiven through the Bankruptcy and Insolvency Act, but there are some special rules. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos & Associates. Today I’m going to explain the seven-year rule for student loan debt in a bankruptcy or consumer proposal.
When you borrowed money to attend school you most likely applied for a loan through a government program like Canada Student Loans or a provincial program, like OSAP here in Ontario. Government student loans can be forgiven in a bankruptcy or consumer proposal in Canada, but you must be past the legal waiting period. That waiting period is seven years. Specifically, Section 178 Sub 1 Sub G of the Bankruptcy Insolvency Act says that government-guaranteed student loans will only be automatically discharged in a bankruptcy if it has been more than seven years since you ceased to be a student; But what does ceased to be a student mean? When does the clock start? When you got the loan doesn’t matter. The important date is when you cease to be a student, which is often the end of the month when you had your last exam or when you graduated or otherwise left school. [1:18-1:20]
If you went back to school after you graduated, that may reset the clock, or not; the rules are somewhat complicated in this area. If you’re considering filing a bankruptcy or consumer proposal and have student debt, it’s important that you confirm your official end-of-study date for government student loan debt. We’ll explain how to do that when you come in for your initial consultation, but basically it involves contacting both the federal and provincial student loan lenders and asking them to send you a letter confirming your end-of-study date. It’s critical that you know what end-of-study date the government has in their system before you decide whether or not to file a bankruptcy or consumer proposal.
Now you may have noticed that up until this point I’ve been talking about government-guaranteed student loans. Many students take out additional private loans when going to school. This is very common in some professional programs. You may have an unsecured loan or line of credit from a bank or credit union. You may have gotten a credit card while you were still a student and still carry a balance. There is no waiting period to discharge private student debt in a bankruptcy or proposal. These debts are forgiven just like any other unsecured debt.
Rules around bankruptcy and student debt can be complicated. If you have student debt, talk to your licensed insolvency trustee about the seven-year rule and any other concerns, so you know exactly how your student loans will be treated before filing. You can also visit Hoyes.com and look up student debt and bankruptcy for more information.
How the 7-Year Rule Is Determined
The 7-Year Rule carries certain specifics:
- The 7-year period starts when you’re no longer a student, not from the loan’s opening date. Canada Student Loans can confirm your official end-of-study date.
- Returning to school in part- or full-time capacity may reset the 7-year period.
These conditions apply to bankruptcy and consumer proposals. Consumer proposals also provide debtor protection under the Bankruptcy and Insolvency Act, meaning you may not be required to pay your student loans until the proposal period ends. If you have not been out of school for 7 years, you can stop making payments during your bankruptcy or proposal but will be required to start making payments again once you are discharged.
What if I have more debts than just my student loans? If you have other significant debts like credit card debts, lines of credit or payday loans, a bankruptcy or consumer may still be a good option even if you don’t meet the waiting period. Filing bankruptcy can help clear other debts and make repaying your student loan more manageable. We know this can be confusing. Our Licensed Insolvency Trustees will discuss the treatment of your specific student loans during your free consultation before you file.
Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
- If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
- If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated. As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. This dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
Student Debt Consolidation
Student debt consolidation is not common in Canada for many reasons. A consolidation loan repays an old debt and replaces it with a new debt. A student debt consolidation loan would be new debt, and as such is no longer technically a student loan. If you have government guaranteed student loans, your current interest rate is likely lower than any student debt consolidation loan. In addition, converting government guaranteed student loans to a private debt consolidation loan will eliminate any student debt tax benefits (interest on eligible student loans is a non-refundable tax credit). You will also no longer qualify for any government repayment assistance program. Banks and financial institutions in Canada are unlikely to approve a consolidation loan for student debt. If you cannot afford your low interest student loan payments, you likely cannot afford a consolidation loan. A consumer proposal is a viable mechanism to consolidate old debt, including eligible student loans, into one monthly payment.
Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are. This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period. If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
Student Debt Less Than Seven Years Old
If your student loan is less than 7 years old, then you still have student loan forgiveness options that can help make repayment of your student debt easier. Negotiate new payment arrangements. Try contacting the student loans office to negotiate a new payment arrangement. Repayment assistance is available through the National Student Loan Service Centre and their Repayment Assistance Plan. You can:
- Ask for a temporary reduction in payments including making interest only payments.
- Ask for more time to repay your student debt. You can extend your payment period for up to 14.5 years.
- Apply for a hardship reduction. The government will reduce your interest costs for the first 10 years and may reduce the principal owing after 10 years. However, you must prove financial hardship to qualify, including meeting an income threshold and approval is not guaranteed.
Be aware that the first two options will keep you in debt longer and will increase the total interest you pay on your student debt. The hardship option is the only option, other than bankruptcy or a consumer proposal, that will reduce the total student loan payments you make over time. If you are successful in negotiating new student debt repayment terms, do your best to maintain the payments to sustain your agreement. The area of bankruptcy and student debt can be complicated. We answer more questions on our student debt help FAQ page.
Can I Get a Student Loan During or After a Consumer Proposal or Bankruptcy?
Consumer proposals or bankruptcy present challenges, but it’s still possible to gain a student loan. Each provincial student loan program has its own regulations, but they generally scrutinize your application more closely.
For example, the Ontario Student Assistance Program requires students to provide documentation of their consumer proposal and proof that student loan funds won’t be paid to creditors. In British Columbia, you’re ineligible for funding until 8-10 years after leaving post-secondary studies.
Proving Financial Hardship
The Hardship Provision is a court-ordered discharge of student loans that lowers the waiting period to 5 years. To qualify, you must demonstrate that you:
- Acted in good faith and intended to repay your loans
- Have experienced and will continue to experience financial hardship
Courts consider how you used student loan funds, your efforts to complete your educational program, your use of repayment assistance programs and your efforts to repay your loans.
Eliminate Student Loan Debt
If you are experiencing problems paying your Ontario student loan we can answer questions that will help you resolve student loans. We offer a free, no obligation consultation. One of our experts will personally review your situation and answer all your student debt related questions. Let us help you choose the correct solution to resolve your student loan debts.
Hoyes Michalos & Associates provides student debt relief services in the following locations
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