Student Loans & Bankruptcy in Canada

Student Loan Debt
& Bankruptcy in Canada
BankruptcyCanada.com

Table of Contents
Page 3:
How Does Bankruptcy Impact Canadian Student Loan Debt?
Page 7:
Student Loan Bankruptcy: The Seven-Year Rule
Page 9:
The Student Loan Bankruptcy Hardship Provision
Page 13:
Is Student Loan Debt Treated Fairly in Canada?

How Does Bankruptcy Impact
Canadian Student Loan Debt?
• Canadian Student loans debt will be eligible for discharge in
bankruptcy if seven years have passed since the former
student ceased to be a full or part time student.
• In cases of undue hardship, a bankrupt may apply to the
Court to obtain the discharge of the student loans after five
years since the schooling.
• For the Court to discharge on hardship grounds, it must be
satisfied that the debtor has acted in good faith and is
expected to continue to experience financial difficulties.
• Federal and provincial governments have implemented
Canadian student loans programs to assist students in paying
for higher education and training.

• In some cases you will be able to include your student
loan debt in a student loan bankruptcy, but you must
meet certain conditions for your student loan debt to be
included in your bankruptcy and eliminated when you
receive your bankruptcy discharge.
• Generally you can only include student loan debt in
bankruptcy if you have not been a student for more
than 7 years, or for less time if you meet the hardship
requirements.
• When you declare bankruptcy you will be ineligible to
receive further funding from the Student Aid funding
program in your province for a certain period of time.

In most cases students benefit from the higher
learning and training.
Students are also eligible for interest relief, debt
forgiveness and other relief.
Because of this, many stakeholders recognize that the
release of Canadian student loans in a bankruptcy
should be subject to special rules, including a waiting
period.

Currently Canadian student loans are not eligible for a
discharge in a bankruptcy unless the student has been out
of school for 7 or more years.
CAIRP (Canadian Association of Insolvency and
Restructuring Professionals), the governing body of
Trustees in Bankruptcy, recommends that the student loan
be eligible for a discharge in bankruptcy, if the student has
been out of school for 5 or more years.
Note: The “hardship provision” will be available to those
people whose date of bankruptcy was prior to the coming
into force of this provision.

Student Loan Bankruptcy:
The Seven-Year Rule
• When you receive your bankruptcy discharge you will only receive a
release from the obligation to pay off your student loans if you file for
bankruptcy at least seven years from the day you stopped being a
part-time or full-time student.
• In other words, you can only eliminate student loan debt in
bankruptcy if you stopped being a student more than 7 years ago.
• If you were a student less than 7 years ago, your student loan debt
cannot be included in your bankruptcy and you must continue paying
your student loan debt or seek another option for getting out of debt.
• The seven-year rule can be reduced to five years if the court finds that
repaying your student loans will result in undue hardship for you.

Does Going Back to School
Restart The 7 Year Clock?
• The Court has interpreted the meaning of “ceased to
be a full or part time student” in section 178(1) (g) to
not include periods of time when the bankrupt was a
student but received no student loans. (Re Ledoux,
2005 SKQB 75, 8 C.B.R. (5th) 225).
• However, in January, 2015 In the case of Re Mallory,
the court ruled that the 7 year clock restarts at the end
of any period of schooling regardless of whether new
loans were obtained.

The Student Loan
Bankruptcy Hardship Provision
• You might be able to apply to the court for an early
discharge of your student loan debt if you have stopped
being a full or part time student only five years ago if
you meet the requirements of the “hardship provision.”
• To have the court accept your hardship provision
application you must convince the court that you acted
in good faith to repay your student loans and have
experienced financial difficulty that will continue that
will make it a hardship for you to repay your student
loan debt.

The Student Loan
Bankruptcy Hardship Provision
• It will be at the courts’ discretion to grant you the hardship
application to allow you to include the student loan debt in
bankruptcy after 5 years and the court may decide to grant
you a partial release of your debts if you demonstrate
“hardship” at repaying your student loan debt.
• What constitutes “good faith” does not have a clear
definition although the court will consider the effort you
made to repay your loan, how you used your student loan
money, if you completed your education studies, and if you
have taken advantage of repayment assistance programs
that are available for students struggling to repay their
debt.

What is “Hardship”?
• There is no set definition of what hardship contains as
each bankruptcy court will have it at their discretion to
decide what “hardship” means for them.
• Hardship is usually considered “continuing to pay the
student loan debt after bankruptcy is a financial
hardship.”

What is “Hardship”?
The court will consider your income and the benefits you
received from your studies.
If you would like to learn more about student loan
bankruptcies please contact a government licensed
insolvency trustee of Bankruptcy Canada by contacting
our team today at 1-877-879-4770 toll free or contact
us online.

Is Student Loan Debt
Treated Fairly in Canada?
For students struggling to pay for higher education or
professional training, governments at the federal and
provincial level have enacted programs to assist students with
student loans.
The reason for these programs is so the student can benefit
from further learning and studies.
Under these programs, students may apply for debts to be
forgiven or to receive relief from interest charges.
Student loans are subjected to strict laws and conditions in
bankruptcy due to these programs and a waiting period must
be reached before student loan debt can be discharged in
bankruptcy.

• The current law dictates that student loan debt cannot
be included in a bankruptcy discharge if the student has
not been out of school for less than 7 years.
• In a hardship situation, the court can discharge the student
loan debt, once five years has passed since the schooling, if
the bankrupt has acted in good faith and will continue to
experience financial problems such that the bankrupt will be
unable to pay the debt.
• The volatile history of student loans makes it clear that the
government and stakeholders are still wrestling with the best
and fairest way to deal with student loans in a bankruptcy.

• One of the main reasons there is such difficulty in coming to grips
with a fair and equitable system is the way in which the loans are
granted.
• The Student Financial Assistance website lists the qualifications for
getting a student loan.
• A major problem is that there is no requirement that the applicant
must have a minimum grade point average nor is there a
requirement that the person is taking a course that will give
him/her a reasonable payback for the cost of the course.
• Because there is no requirement of a minimum grade point average
many loans are granted to students, who do not have the academic
qualifications to complete their selected course of studies.

• In my practice, the overwhelming number of students I
saw, who wanted their debt discharged in a bankruptcy,
did not complete their studies and were in low-paying,
often minimum wage jobs.
• Another problem I saw, at first hand, was the person
who paid, for example, for a hairdressing course. The
course was very expensive yet the pay for a qualified hair
dresser is very low — at or close to minimum wage.
• These people cannot afford to pay back their student
loans.
• Some people say that these people abused their student
loans.

• Others say that mistakes were made but that youth
is the time to make and learn by mistakes.
• I feel that we put an unfair burden on these students
by sentencing them to be pursued by credit
collectors until seven years has passed before the
student can seek debt relief in a bankruptcy.
• It is ironic that one of the issues being reviewed for
change in this go-around of the review of Canada’s
insolvency laws is the issue of responsible lending.

• The talking points produced are:
• Credit grantor behaviour may also contribute to financial
difficulty for some creditors. For example, credit granting
practices such as extending credit on onerous terms to
individuals who are unable to meet their existing financial
obligations can lead to higher rates of insolvency.
• Possible responses could include empowering the trustee or
court to disallow the claim of a creditor where credit was
extended improvidently or on unconscionable terms.
Additionally, the lender could be required to repay payments
made on such loans in the period leading up to a bankruptcy
or proposal.

Student Loans & Bankruptcy in Canada

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