Can student loans be discharged in a Bankruptcy?

Student loans are a contentious topic, and even more so in recent history.

Many people continue to argue they’re one of the few types of good debt because spending on education increases your earning potential and can create a significant long-term return on investment.

Others believe that line of thinking is outdated because the cost of post-secondary education has vastly outpaced the rate of inflation, and student loans can trap consumers into decades worth of debt.

Muddying the waters even more are the rules surrounding what happens if a borrower can no longer afford their student loan repayments. Can you include them in a Bankruptcy or Consumer Proposal, or can’t you?

Here, we encounter the ever dreaded, “it depends.”

The following questions will help you determine whether your loans may be eligible for discharge in an insolvency proceeding. And, if they aren’t, how you can still get the financial relief you deserve.

What kind of loans do you have?

There is a common misconception that the rules for student loans apply to all debts used to pay for post-secondary schooling. In fact, these only apply to loans issued by the provincial and federal governments.

Student loans and lines of credit issued by a bank or private lender are just like any other unsecured debt. You can include these in a Bankruptcy or Consumer Proposal immediately.

When did you finish school?

You must be out of school for at least seven years for your government student loans to be eligible for discharge in a Bankruptcy or Consumer Proposal in most cases.

Having student loans does not prohibit you from filing a Bankruptcy or Consumer Proposal if you have other unmanageable debts. However, your student loans will survive your insolvency.

What other debts do you have?

Should you wait until your student loans are eligible for discharge before filing a Bankruptcy or a Consumer Proposal? This will depend on several factors, such as when the seven-year time limit will expire and how other debts factor into your current financial challenges. 

If you’re considering a Life-Changing Debt Solution, it’s likely because your situation is urgent and requires immediate relief. Unless there is a good reason to wait, any delays would likely just prolong your stress, increase your costs, and cause your financial situation to worsen.

While a Bankruptcy or Consumer Proposal will not address your student loans directly, it could free precious room in your budget and make your finances easier to manage.

What alternatives have you considered?

The federal government does provide several payment options to help those who are struggling to keep up with their student loan payments. These will not directly reduce the total amount owing, but they can help to manage the costs and make monthly payments more affordable.

Revision of terms

 If you experience financial hardship, you may be able to extend your repayment period. This would make your monthly payments more affordable, but it would also result in paying more interest over the lifetime of your loan. You could also arrange to make interest only payments for up to one full year over the lifetime of your loan. 

Repayment assistance plan

Low-income Canadians and those with a permanent disability may qualify for financial support from the federal government to help pay down student loans. Depending on your situation, this could significantly reduce or eliminate your monthly payments.

Early relief may be available

There is a provision that allows for student loans to be released within five years instead of seven for individuals experiencing significant financial difficulties.

For this to be available, you must have either completed a Bankruptcy or Consumer Proposal or have no other debts — and you must be able to demonstrate it’s impossible to manage your payments.

Discuss your options with a professional

The rules surrounding government student loans are complicated and can feel disheartening — especially if this source of debt is causing the bulk of your financial difficulties. It’s important to remember Bankruptcy legislation exists to provide Canadians like you with the opportunity for a financial fresh start. Even if we can’t find a perfect solution, there are always options to find the relief you deserve.

Schedule a Free Confidential with an MNP Licensed Insolvency Trustee to discuss what might be possible for your unique situation. Together, we’ll assess your budget and financial challenges and identify opportunities to begin reducing your debt.

Licensed Insolvency Trustees are the only professionals who are qualified to advise on Bankruptcies and Consumer Proposals. They can also provide more information about whether you might qualify for early relief or may benefit from payment support programs until your student loans are eligible for inclusion in an insolvency proceeding.