Student loan debt is a significant concern for many individuals in Canada. According to Statistics Canada, the average debt for Bachelor graduates is $28,000. As some people struggle to pay off their student loans, they may consider bankruptcy as a potential solution. But, is bankruptcy the answer to student loan debt? This article explores this question in detail.
Understanding Bankruptcy for Student Loans in Canada
The Bankruptcy and Insolvency Act (BIA) offers Canadians a way to seek debt relief. Initially, bankruptcy was primarily used to relieve credit card debt, personal loans, and lines of credit. However, current legislation stipulates that individuals must be out of school for a specific period before including their student debt in bankruptcy filings.
Student loans are treated differently depending on how long it’s been since you finished your studies:
- 7 years or more: If you’ve been out of school for more than seven years, your student loan debt may be included in a bankruptcy filing or a consumer proposal.
- Less than 7 years: If it’s been less than seven years since you finished your studies, your student loan won’t be automatically discharged through bankruptcy.
The 7-Year Waiting Period Explained
The “7-year rule” refers to the length of time after finishing your studies before your student loans can be discharged through bankruptcy. This date refers to the last day you were registered as a student.
Finding Your End Of Study Date
The BIA specifically excludes student loans if this 7-year waiting period isn’t met. You can find your end-of-study date by contacting the National Student Loan Centre. Once you know this date, add seven years to calculate when your student loan may be discharged through bankruptcy.
Discharging Student Debt Less Than 7 Years Old
While you generally can’t discharge student loan debt that’s less than 7 years old, there is a provision for “hardship.” If it’s been five or more years since you finished your studies, you can apply for an early discharge under this provision.
Hardship Provision for Bankruptcy
To qualify for an early discharge under the hardship provision, you must provide the bankruptcy court with evidence of financial difficulties. The court will also consider whether you acted in “good faith” in trying to repay your student loan.
Converting Government Student Loan To Regular Loan
You could take out a new loan to consolidate your student loans. However, this would cancel any tax benefits associated with government student loans. For example, the interest on certain student loans qualifies for a non-refundable tax credit.
Bankruptcy For Private Student Loans
Private student loans can qualify for automatic discharge under the Bankruptcy and Insolvency Act, regardless of their age. This means that private student loans are treated like any other unsecured debt during bankruptcy, making them eligible for discharge without any waiting period.
Alternatives to Bankruptcy For Student Loans
If your student loan is less than 7 years old, there are still ways to manage your student loan debt. These include:
- Repayment Assistance Plan: The National Student Loan Service Centre offers repayment assistance through the Repayment Assistance Plan (RAP).
- Student Debt Consolidation: Consolidating government student loans with a personal loan means your government student loan would cease being a student loan.
Dealing With Other Debts
Apart from student loans, many Canadians struggle with mounting debt from different sources. If you have other major debts, bankruptcy can help you deal with them and make paying back your student loan more feasible.
Final Thoughts
Dealing with student loan debt can be stressful. If you’re struggling to pay off your student debt, contacting a Licensed Insolvency Trustee can help you navigate all your options and find the best solution for your situation. Remember, bankruptcy is a serious decision and should only be considered as a last resort.
By understanding all the options available, you can make an informed decision about whether bankruptcy is the answer to your student loan debt.
