Dealing with Student Loans
Some individuals find themselves in financial difficulty after they have finished their studies. Perhaps they used their available credit to cover living expenses and/or school expenses while they studied. Or they finished their studies a while ago and haven’t been able to find adequate employment to support themselves and make payments on the outstanding student loan debt.
This is a complex subject and it is very important to understand not all student loans are the same. For example, student loans can come from a variety of sources, Government of Canada through the National Student Loans Services or Government of BC through Student Aid BC or Local banks & Credit Unions. Each of these sources represents a different type of liability.
Bankruptcy is always the last option when dealing with unmanageable debt. When dealing with student loan debt, both government bodies provide assistance programs, repayment assistance plans can help you balance your financial load. Bank backed student loans however do not have any repayment assistance plans.
If you have exhausted your options on dealing with your debt and find yourself facing the possibility of bankruptcy, only your government student loans have special consideration under the laws of the Bankruptcy Insolvency Act.
What happens to my student loans if I file for bankruptcy?
Automatic Stay of Proceedings
As soon as you file for bankruptcy there is an automatic stay of proceedings. That means that any collection action against you must stop (except for collection of outstanding child and/or spousal support under the Family Maintenance Enforcement Program). The stay also affects your student loans. This means that the federal or provincial student loans program can’t garnish your bank account or paycheque, or seize your income tax refund or GST rebate once you have filed for bankruptcy.
The 7 year rule for student loan debt (Section 178(g) of the Bankruptcy & Insolvency Act)
If you declare bankruptcy seven or more years after the date you stopped being a part-time or full-time student, your student loan will be discharged by your bankruptcy. This means that you will no longer have to pay back the student loan. If you declare bankruptcy within 7 years of being a full or part-time student the student loan debt will survive the bankruptcy and you will have to resume making payments on the remaining balance.
The 5 year exception on student debt (Section 178(1.1) of the BIA)
If your student loan debt was not discharged by your bankruptcy because it was less than 7 years since you were a student, you can still apply to the court 5 years after you ceased to be a student to have the student loans discharged under Section 178(1.1) of the BIA. In this application you will need to satisfy the court that you have acted in good faith in connection with your obligations under your student loans; and repaying the loan will cause you undue hardship.
What does this mean? You must prove to the court that since your discharge from bankruptcy you have experienced, and will continue to experience, financial difficulty that will prevent you from repaying your student loan; and you have acted in good faith towards your obligation to repay your student loans. In deciding whether you have acted in good faith, the court may consider how you used your student loan money, what efforts you have made to repay the loans, and whether you used available assistance programs.
Bank backed education loans If you education was funded through a bank backed unsecured loan, it would not be subject to the special provision of the BIA and would be considered a regular creditor on any bankruptcy proceedings.
For further information on dealing with student loan debts we are available for a free consultation. Let us help you.