Can A Bankruptcy Or Consumer Proposal Help With My Student Loan Debt?

Federal and provincial student loans have enjoyed a special status over the years. The answer to the question of what debt solutions are available to you in the case of student loan debt, is not a simple one depending on the length of time you have been out of school.

There is a significant amount of case law on the matter, with varying results. and Ultimately, you should always speak to a Licensed Insolvency Trustee to get the facts about your individual situation.

To try and put it in simple terms, if you have ceased to be a student for more than 7 years, your student loans can be released in a bankruptcy or Consumer Proposal.

Where it becomes more complicated, is when you have not been out of school for 7 years. How can student loans be dealt with if you are experiencing financial difficulty and are unable to pay them?

It is important to understand that when you file a bankruptcy or proposal, all creditors are prohibited from taking action or collecting from you until the Trustee closes your file. What this means is that although student loans cannot be released if you have not been out of school for 7 years, they cannot collect from you during your bankruptcy or proposal proceeding. This can give you the breathing space that you need to effectively manage your student loans once your bankruptcy or proposal is finished.

For many people, student loans are not their only debt. Depending on what percentage of your debt is a government student loan, you may get different advice on how you might be able to best deal with it.

For example, if your total debt is $50,000.00, but only $10,000.00 of that debt is from government student loans, it may benefit you to file a bankruptcy or proposal in order to get the majority of the debt released, giving you the ability to pay the student loans once the bankruptcy or proposal is completed.

The downside to this strategy is that if you do not make your student loan payments during your bankruptcy or proposal, you will be in default of the student loan. This makes it difficult to qualify for the many programs that government student loans have to help you manage your student loan debt.

Alternatively, you can file your bankruptcy or proposal to deal with the non-student loan debt and make arrangements with the government regarding your student loans to continue making payments on that debt only. This will save you from being in default and allow you to qualify for some of their many programs such as interest relief. Please check the student loan website to find out more about student loan programs that can help provide you with some financial relief.

Although technically student loans cannot take action against you during your bankruptcy or proposal, if you have the ability to make payments to them during that time, it will be beneficial because you will not end up in default at the end. The bankruptcy and Insolvency Act also provides for possible release of student loans for people who have not been out of school for 7 years, but are experiencing financial difficulty to the extent that they will never be able to pay the debt.

This section applies if you have been out of school for 5 years, have filed a bankruptcy or proposal, and all of your other debt has been released.

For example, if you finished your schooling 6 years ago and during the interim, you filed a bankruptcy and were discharged or you completed a consumer proposal and you are still experiencing financial difficulty, you can make an application to the court to have the student loans released due to financial hardship even though it has not yet been 7 years since you ceased to be a student.

This is a good option for those who filed a bankruptcy or proposal to release most of their debt but who still have student loans owing and will never be able to pay them.

We know that student loans can be a complex issue. For some people, it is difficult to tell when the clock starts because they may have gone to school with the help of student loans, completed those studies more than 7 years ago, but then returned to school years later without receiving student loan funding for the return to school period. The question then arises, does the 7 years start only for the schooling that was funded by student loans or does the clock start after the end of the second schooling that was not funded by student loans? Legislation is unclear and there is a lot of discussion and case law surrounding this issue. It is important to always keep in mind, that these rules apply to government funded or guaranteed loans, not bank loans that you obtained in order to complete your education. If you went to your bank and applied for a loan to pay for your schooling, that loan is just a regular loan that will be able to be dealt with in a bankruptcy or a proposal.

Navigating through student loan debt and gaining a full understanding of what qualifies and how when it comes to debt solutions, can be overwhelming. Contact your local MNP advisor for a free, no-obligation consultation where you can assess your individual situation and decide on a debt solution which is compliant with legislation, while meeting your unique personal financial needs.