Is Going Bankrupt A Good Choice For Student Loan Debt?
The question, “Is Filing Bankruptcy In Canada A Good Option for Student Loans?” is a perplexing one for many. The uncertainty arises due to the distinct legislation governing student loan debts and bankruptcy in Canada. This article endeavors to unravel this complex issue, helping you understand the nuances of the laws surrounding student loans and bankruptcy.
Understanding the Connection Between Student Loans and Bankruptcy
Before we delve into the details, it’s crucial to grasp the fundamental legal framework governing this issue. The core legislation that presides over student loan debt and bankruptcy is the Bankruptcy & Insolvency Act, specifically Section 178 (1).
The Technicalities: Bankruptcy & Insolvency Act
Here’s a simplified interpretation of the jargon-filled legal terms:
A bankruptcy discharge order does NOT include:
Loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any similar provincial legislation, where bankruptcy is declared:
- Before the end of student status, or
- Within seven years after ending student status;
- Any interest incurred on such loans.
Essentially, this means that you must wait for seven years after completing your education before declaring bankruptcy for your student loan to be discharged automatically.
The 7 Year Rule: A Detailed Examination
The critical factor here is the date when you stopped being a student, not the loan’s issuance date. If you secured a loan in 2002 and graduated in 2006, the seven-year period commences in 2006, not 2002. In this case, you’d have to wait till 2013 to declare bankruptcy, ensuring that your student loans are discharged automatically with your other debts.
However, note that the seven-year rule requires you to abstain from any form of education for the past seven years. Attending even a single part-time class could prevent your student loans from being automatically cleared in your bankruptcy.
The Hardship Provision: A Ray of Hope
What if financial constraints make it impossible for you to repay your student loan? In such a scenario, the ‘hardship provision‘ could serve as a lifeline. If it has been five years or more since you ceased being a student, you may apply for your student loans to be discharged in a bankruptcy under the hardship provision.
The Legal Fine Print
The court might waive Section 178 (1) under the following conditions:
- Five years have passed since you ceased being a student, and
- The court is convinced that:
- You have made sincere efforts to repay the debt, and
- You will continue to face financial difficulties that prevent you from repaying the debt.
In layman’s terms, this means that you can request the court to reduce or discharge your student loan after five years. However, you must prove to the court that you will continue to experience undue financial hardship that prevents you from repaying your student loans, have made all possible efforts to repay those loans (including applying for repayment assistant programs), and have used your student loan money appropriately.
Is Bankruptcy A Viable Solution for Student Loans?
If it’s been more than seven years since you ceased being a student and you’re unable to repay your student loan, declaring bankruptcy might be a feasible option. Your student loans will be included in your bankruptcy.
However, if you were a student less than seven years ago, you have a few alternatives:
- Wait until the seven years have passed, and then declare bankruptcy.
- If you have substantial other debts (like credit card debts) along with your student loans, declaring bankruptcy might still be a good option. Dealing with your other debts could free up enough income to repay your student loan debt. The best option will depend on your personal situation, including the amount you owe in both student loan and other debts.
- If you’ve been a student for more than five years and are experiencing undue financial hardship, bankruptcy might be an option if you qualify for the financial hardship provision.
Before making a decision, it’s advisable to contact a Licensed Insolvency Trustee who can review your situation and guide you to determine if declaring bankruptcy is indeed the best option for you.
In conclusion, while the question of “Is Filing Bankruptcy In Canada A Good Option for Student Loans?” is complex, it’s not without answers. With a comprehensive understanding of the rules, the right advice, and careful consideration, you can make an informed decision about managing your student loan debts.
