Student Bankruptcy: Student Loan Debt in Bankruptcy And Waiting Periods
What To Know If You Cannot Pay Your Student Loans
Many people come out of college or university burdened with a significant amount of debt.
If you are struggling with repaying your student loan debt after leaving school you are not alone.
We hope this article provides some helpful information.
If you are a student in need of relief from student loan debt you might be able to file bankruptcy.
A consumer proposal is also a good way to clear student loan debt in some cases.
However, you need to meet certain requirements in order for your student loan debt to be eligible to be discharged in bankruptcy or by making a consumer proposal.
Your student debt can only be included in a bankruptcy or proposal if your student loans are a certain age.
It also depends whether you have a private student loan with a bank or government-guaranteed student loans.
In order to file a successful consumer proposal, your budget must also be able to handle payments that will be attractive enough to your creditors.
In order to determine if bankruptcy, a consumer proposal, or another debt relief option will work for you you can meet with one of our licensed insolvency trustees to review the pros and cons of each student debt relief option.
Student Loan Debt and Bankruptcy Law in Ontario
Student loan debt is treated differently than other unsecured debts under the Bankruptcy & Insolvency Act in Ontario.
While most unsecured debts such as credit card debt can be eliminated in bankruptcy, student loan debt is given special treatment.
These special rules apply to student loan debts guaranteed by the government, such as OSAP loans.
Waiting Period Rules for Student Loan Debt
Section 178 (1) of The Bankruptcy & Insolvency Act sets out a 7 year waiting period before you can include student loan debt in a bankruptcy filing.
Basically this means that you must be out of school for seven years or more before student loan debt can be eliminated in a bankruptcy or proposal.
Students who have not been out of school for more than 7 years can file bankruptcy or proposal for their other debts, and this might give them enough extra money to pay off their student loan debt in a timely manner.
Student debtors with a large amount of other consumer debt can still benefit from insolvency by making their student loan debt payments more manageable.
Bankrupts with student loan debt can also stop making payments on all of their debt, including their student loans, if they have filed for bankruptcy but are not eligible to include the student debt in their bankruptcy.
If you owe money on your student loans and you wait long enough this debt can be included in a bankruptcy or consumer proposal.
If the waiting period has not passed however the student loan debt will survive your bankruptcy or proposal.
In the aspect of student loans and bankruptcy there are two important waiting periods to be aware of:
Seven years from the date of the end of your education Five years from the date of the end of your education
The 7 year waiting period is the period a student must wait from when they ceased being a student to have their student loan debt be eligible for discharge in a bankruptcy or consumer proposal.
The 5 year waiting period is for students who can prove that fulfilling the 7 year period to discharge their student loan debt would cause undue “hardship.”
In rare cases a student can apply for a hardship provision that will reduce the waiting period from 7 years to 5.
When Does the 7 Year Waiting Period Start?
We have seen students who have filed bankruptcy or a consumer proposal only to find out afterwards that they missed the end of the 7 year waiting period by a few weeks or months.
In this case, their debt would not be discharged in the bankruptcy or proposal.
In order to avoid this situation it is very important that you and your Trustee calculate the 7 year waiting period properly.
We recommend that you calculate the end of your education (and the start of the 7 year waiting period) as the latter of:
The day you stopped attending school, or; The last day of exams for a semester you were attending.
We also recommend that you wait an additional month or two before filing bankruptcy to be safe if you intend to have your student debt included in your insolvency.
Before you file for bankruptcy the Licensed Insolvency Trustee will ensure that you understand exactly how bankruptcy or a proposal will work for you and how it will impact your debts.
What are the Benefits of Reaching the end of the 7 Year Waiting Period?
By reaching the end of the waiting period you can discharge all of your student debt by filing for bankruptcy or making a consumer proposal.
You will be entitled to an automatic discharge of all outstanding student loan debt when you receive your discharge from bankruptcy or certificate of completion for your proposal.
Can I Consolidate my Student Loan Debt?
While you can technically consolidate your student loan debt, it is very rare in Ontario for several reasons.
The first reason that student debt consolidation is rare in Ontario is because the interest rate on your government issued student debt is likely lower than the interest rate you could get on a consolidation loan.
Secondly, by converting student loans to private debt through a debt consolidation loan you will lose your student debt tax benefits.
Banks are unlikely to approve you for a consolidation loan to deal with your student loan debt if you cannot afford to repay your low-interest student loan payments.
What if my Student Loan Debt is Not Government Issued?
Private student loan debt, such as money borrowed from a bank in a student line of credit or through a credit card eligible for students, is eligible for an automatic discharge under the Bankruptcy & Insolvency Act.
Private student loan debt is treated as any other unsecured debt in a bankruptcy.
If you are unsure of how bankruptcy or a consumer proposal will impact your student loan debt please book a free consultation with one of our government Licensed Insolvency Trustees to disucss your situation with a bankruptcy help expert.
“Hardship Provision” Reduces the Waiting Period to 5 Years
Any debtor who goes bankrupt or makes a consumer proposal with their creditors less than 7 years after the end of their post-secondary studies are not eligible for an automatic discharge of their student loan debt.
However, a student who has been out of school for at least 5 years may apply to the bankruptcy court for a “hardship provision.”
The bankrupt must make an application to the bankruptcy court and appear before the judge.
If the court successfully grants the hardship provision, the student may get a discharge of their student loan debt after only 5 years.
Alternative to Bankruptcy for Student Loan Debt: Consumer Proposals
An attractive alternative to bankruptcy for some students in Ontario is a consumer proposal.
As with bankruptcy, student loans can only be included in a consumer proposal if the student has been out of school for 7 years or more.
Debtors within a consumer proposal can stop making payments on their student loans if they haven’t included the debt in their proposal plan.
You also have the option to continue making payments.
Many people find this very manageable because they are no longer paying to service their other debts.