Tuition costs, the price of books, and other school expenses are on the rise. It is no surprise that student debt is also increasing—and becoming unmanageable for many people. A significant number of Canadians finance their post-secondary education with government student loans such as British Columbia Student Aid, private loans from a bank, or both. They work hard at their studies but then find it impossible to get out from under student loans. If you are struggling to pay off loans, there are several options for student debt relief. Today we will look at two options: bankruptcy and consumer proposals.
How does bankruptcy affect student loans?
The answer depends on the type of loan and when you stopped being a student:
- Personal bankruptcy eliminates most unsecured consumer debt (e.g. a student credit card, line of credit, or other private bank loan used to finance your education). These types of debt can be cleared by filing for bankruptcy, regardless of when you took on the debt or how long has passed since you finished school.
- There are special rules for government student loans. They can be cleared by filing for bankruptcy, but only if you stopped being a student more than seven years ago. This is known as the “seven-year rule” and it is found in section 178(1) of Canada’s Bankruptcy and Insolvency Act.
So, if it has been less than seven years since you were a full-time or part-time student at any school, your government guaranteed student loan cannot be discharged through a bankruptcy, but other types of unsecured student debt or consumer debt can. You can still file for bankruptcy if the seven years have not yet passed; that will give you a measure of debt relief as lenders are not permitted to collect while you are in bankruptcy (this is because of the protection provided under the Bankruptcy and Insolvency Act). However, you will be required to re-start making payments on your government student loans once you are discharged from bankruptcy. For some, it may be possible to reduce the seven-year period to a five-year period, if repaying a government student loan will cause “undue hardship.” Your best bet is to talk to a Vancouver bankruptcy professional for more information on the hardship test and whether it makes financial sense to file for bankruptcy even if the seven-year (or five-year) period has not yet passed.
How does a consumer proposal affect student loans?
A consumer proposal offers an option to negotiate with your creditors through a Licensed Insolvency Trustee (“LIT”), to pay less than what you actually owe to eliminate debts. It usually covers all your unsecured debts, which may include student loans—but the seven-year rule also applies to consumer proposals. If you make a consumer proposal and it has been less than seven years since you attended school, any government guaranteed student loans will notbe automatically discharged. Private bank loans, credit cards, and other types of consumer debt can be eligible for automatic discharge if you make a consumer proposal, regardless of how long it has been since you finished school.
You can choose to continue making payments against your non-dischargeable government loans while in a consumer proposal; in fact, you may find it much more manageable to make the loan payments when your credit card debt or other types of consumer debt are reduced or eliminated by the proposal. But, you are not required to do so. Debtor protection from creditors under the Bankruptcy and Insolvency Act extends to you if you make a consumer proposal. Lenders are not allowed to collect while you are in a consumer proposal. However, that debt will still be there when the term of your proposal is up.
Can I get a student loan after a consumer proposal or bankruptcy?
You may still be able to apply for a student loan after a bankruptcy or consumer proposal. You will need to disclose in your application that you filed any proceeding under the Bankruptcy and Insolvency Act, and the loan officer or lender will likely request additional information. If your bankruptcy or consumer proposal had nothing to do with student debt, it may have no impact on your ability to qualify for a student loan. If you have declared bankruptcy, the amount of time that has passed since you left school may factor into future eligibility for federal or provincial government loans. Each jurisdiction has its own rules. For example, if you declare bankruptcy, you may not be eligible for any more StudentAid BC funding until 10 years (or 8 years under financial hardship conditions) after you have left post-secondary studies.
Do you have questions about debt relief for your student loan?
Vancouver debt experts Crowe MacKay & Company are here to help. If you are struggling to pay student debt and considering filing for bankruptcy or making a consumer proposal, reach out to our Licensed Insolvency Trustees. We can evaluate your current financial situation, suggest solutions to deal with your student loan debt, and guide you through the process for the option that is right for you. There are several options to explore, in addition to a consumer proposal or bankruptcy. Vancouver and Surrey office appointments are available, as are virtual appointments. Get started by filling out our Debtor Application Form or by calling us today at (604) 689 3928 to schedule your free initial appointment with one of our insolvency trustees.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.