Debt Relief Experts
Canada student loans receive special treatment under the Bankruptcy and Insolvency Act.
Most student loans are government guaranteed which means that the bank that provided the funding is protected in the event the loan goes into default.
To protect the government from a run on unpaid student loans, rules were added to Canadian bankruptcy law to limit the extent to which student debt could be discharged in a bankruptcy or consumer proposal. This became known as the 7-year rule.
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What Is the Student Loan 7-Year Rule?
The 7-year rule for student loans in bankruptcy is outlined in Section 178(1)(g) of the Bankruptcy & Insolvency Act.
This rule simply means that government student loans can only be automatically discharged in bankruptcy if it has been more than seven years since the borrower ceased to be a student.
“Any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred (i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or (ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student;”
The 7-year rule only applies to government student loans. Student credit cards and private student loans, such as those from banks or credit unions, are treated like any other unsecured debt in bankruptcy and can be discharged regardless of how long ago you were a student.
Do Student Loans Go Away After 7 Years? What Happens?
Student loans do not automatically disappear after 7 years. However, once 7 years have passed since you ceased to be a student, your government student loans become eligible for discharge through bankruptcy or consumer proposal.
After this 7 year ‘waiting period’, if you haven’t been able to repay your student loans, personal bankruptcy or filing a consumer proposal can be a good option to obtain relief from student debt.
If you are considering filing a bankruptcy or consumer proposal and have student debt, it is important that you confirm your official ‘end of study date’. This date doesn’t mean the last day you attended school. It is the date that the government considers to be the last date of the program you were last enrolled in. It also includes both full-time and part time attendance.
You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.
Struggling with student debt?
The 5-year Hardship Provision
Canadian law offers a provision for discharging student loans after only five years in cases of extreme financial hardship.
Under Section 178(1.1) of the Bankruptcy and Insolvency Act, a court may order that student loans be discharged if:
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at least five years have passed since you ceased to be a student,
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you have acted in good faith when using your federal student loans and
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you are experiencing and will continue to experience significant financial difficulty in repaying the loan.
To qualify, you must demonstrate to the court that repaying the student loan would cause undue hardship, considering factors such as your income, expenses, and any medical conditions affecting your ability to work. This process requires filing a separate application with the court and presenting your case at a hearing. Given the complexity of proving undue hardship, it’s highly recommended to consult with a Licensed Insolvency Trustee or a bankruptcy lawyer who can assess your eligibility and guide you through the application process.
Alternatives to Bankruptcy for Student Loan Debt
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 7-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 7 years. Specifically, section 178 sub J of the Bankruptcy and Insolvency Act says that government guaranteed student loans will only be automatically discharged in a bankruptcy if it has been more than 7 years since you ceased to be a student. But what does cease 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. 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 are considering filing for 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 7-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.
Before considering bankruptcy, it’s worth exploring other options for managing student loan debt:
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Repayment Assistance Plans: The government offers various repayment assistance programs to help borrowers manage their student loan payments, including reduced payments based on income.
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Consumer Proposals: This is a formal, legally binding process where you offer to pay creditors a percentage of what you owe over a specific period. A consumer proposal provides immediate debt relief and student loan forgiveness if you have been out of school for 7 years.
Navigating student loan debt and considering options like bankruptcy can be complex. It’s crucial to seek professional advice from a Licensed Insolvency Trustee.
As Licensed Insolvency Trustees, Hoyes Michalos has the expertise to guide you through your options and help you make the best decision for your financial future. Our team can:
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Assess your specific financial situation
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Explain how the 7-year rule or 5-year hardship provision might apply to your case
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Explore alternatives to bankruptcy that may be suitable for your circumstances
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Guide you through the bankruptcy process if it’s determined to be the best option
Don’t let student loan debt hold you back from financial freedom. Talk with a Licensed Insolvency Trustee about your options.
