When are Student Loans Discharged in a Bankruptcy in Canada?
The statistics surrounding student loans in Canada are very worrying.
The most recent stats show that 49% of graduates in 2015 were in student debt, and 20% of these graduates owed over $25,000.
To make matters worse, the average student loan debt in 2015 was $15,300.
The next set of statistics is due to come out within the next year, and many financial experts in Canada suggest these figures are on the rise.
Consequently, you can have a mountain of student debt that sets you down a tough financial path.
Alongside this, you may end up with even more debts, falling into a dark debt spiral.
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You’ve tried everything to be rid of your debt, but nothing works.
Finally, you consider filing for bankruptcy – but are student loans discharged as well?
They’re unsecured loans, so you’d assume they’re included amongst your discharged debts.
However, there’s more to it than meets the eye.
Student loans aren’t automatically discharged
First and foremost, student loans aren’t automatically discharged when you declare bankruptcy.
You have to meet specific criteria before your loan is cleared.
If the criteria are met, you can clear your student loan and start rebuilding your life after bankruptcy.
What are student loans discharged in bankruptcy?
In Canada, there’s something called the seven-year rule that applied to student loans and bankruptcy.
Effectively, your student loans are discharged in bankruptcy if you have stopped being a student for at least seven years.
The key nuance here is that the seven-year rule activates from your graduation date, not the date you applied for your loan.
Let’s say you applied for a loan in 2017, completed three years as a student, then graduated in 2020.
Your student loan is eligible to be discharged in 2027, NOT 2024.
While seven years is the general rule, there’s also a hardship provision to help former students in clear financial distress.
If you have stopped being a student for five years, you can try to apply for an early discharge on your student loan.
To qualify for the hardship provision, you must have shown that you’ve attempted to repay your student debts, and are experiencing financial difficulty that makes it impossible for you to repay them.
The court will decide if you deserve a hardship provision, so not all students can get one.
Still, it’s worth looking into if you’ve been a graduate for five years and are considering bankruptcy.
So, as a summary:
- Student loans aren’t automatically discharged from bankruptcy in Canada.
- Student loans are discharged if you have stopped being a student for seven or more years.
- Student loans could also be discharged within five years of graduating if you apply for a hardship provision.
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