Many Canadians facing financial difficulty are also struggling to make payments on their student loan debt. Depending on the type of debt and time since you last studied, student loan debts may be forgiven through bankruptcy or through a consumer proposal.

How does Canadian bankruptcy law treat student loan debt?

The Bankruptcy and Insolvency Act treats student loans received under the Canada Student Loans Act or similar provincial legislation (i.e. OSAP) differently than unsecured debts like credit cards. Student loan debts cannot be automatically discharged by filing an assignment in bankruptcy or the filing of a consumer proposal unless the bankrupt ceased to be a full-time or part-time student for a minimum of seven years prior to the filing of an assignment in bankruptcy or the filing of a consumer proposal.

If the bankrupt ceased being a full-time or part-time student for a minimum of five years, the bankrupt can apply to the Court to have their student loan debts not previously discharged under their bankruptcy or consumer proposal discharged pursuant to section 178(1.1) of the Bankruptcy and Insolvency Act.

To be successful on what is often referred to as a “hardship application” pursuant to section 178(1.1) of the Bankruptcy and Insolvency Act, the bankrupt must prove:

• the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and,
• the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.

Good Faith

In determining whether the bankrupt acted in good faith, the Court has ruled that the following non-exhaustive list of factors should be taken into consideration:

• whether the money was used for the purpose loaned;
• whether the education was completed;
• whether the bankrupt derived economic benefit from the education;
• whether the bankrupt made reasonable efforts to repay the loans;
• whether the bankrupt made use of available options such as interest relief; and,
• the timing of the bankruptcy.

Continued Financial Difficulty

The Bankruptcy and Insolvency Act does not provide any guidance to the court as to the appropriate duration of time into the future wherein the bankrupt must experience this financial difficulty.  However, the Court has interpreted section 178(1.1)(b) of the Bankruptcy and Insolvency Act to consider the bankrupt’s circumstances for the next two or three years.

Waterloo bankruptcy lawyers helping clients manage their student loan debt

At Duncan Linton LLP, our experienced bankruptcy and insolvency lawyers have experience advising clients about all manner of financial concerns, including how to manage student loans and other debts. We can offer clear advice about your options, and assist with bankruptcy proceedings, structuring consumer proposals, and exploring potential alternatives.

If you would like to hear more about this topic, you can listen to an interview between Daniel W. Veinot of our office and Doug Hoyes of Hoyes, Michalos & Associates Inc. on the podcast “Debt Free in 30” here. To make an appointment with one of our lawyers, please contact us online, or call 519-886-3340.