Student Loans Under the Bankruptcy & Insolvency Act

Credit ColumnThe Bankruptcy & Insolvency Act of Canada (the Act or BIA) eliminates most unsecured debts like credit card debt, bank loans, lines of credit and payday loans.  There are, however, certain debts that are excluded under the Act. Student debts are often confusing because some debts can be automatically discharged if you file for bankruptcy while others cannot.

The first distinction to consider is whether your student loans are government guaranteed or private loans. If you have a government loan, for example through the Canada Student Loans Act, then your loans are considered government guaranteed.  If you went to the bank to take out a bank loan, set up a line of credit, or get a credit card to use while in school, these are considered private loans.

Unsecured private loans, even though you used the money to attend school, are considered regular unsecured debts. These are automatically discharged if you file and complete your bankruptcy.

It is possible for the federal government, which has guaranteed your student loans, to oppose your discharge, ask the court to lengthen your bankruptcy and ask that you pay more. Government guaranteed student loans fall under special provisions in the BIA for student debt that mandate that student loans cannot be automatically discharged in a bankruptcy or consumer proposal unless you have ceased to be a student for at least seven years.  The relevant laws are under Section 178 1(g) of the BIA and state that an order of discharge does not release a bankrupt from:

(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred:

(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student.

Similar rules apply to loans made under the Apprentice Loans Act.

The key term here is ‘ceased to be a student’. That means full or part-time at any time during the past seven years. If you return to school for even one term or one month, the clock starts ticking again.

If your student loan is less than seven years old, it will survive bankruptcy or a consumer proposal and will remain payable.

To complicate matters more, there has been some interesting case law and creditor issues around student debt and the BIA.

If your student loan is less than seven years old, it will survive bankruptcy or a consumer proposal and will remain payable.

Technically, any creditor can oppose your discharge from bankruptcy. This happens very rarely but it is possible. It is possible for the federal government, which has guaranteed your student loans, to oppose your discharge, ask the court to lengthen your bankruptcy and ask that you pay more. Again, this is rare but may happen if student loans make up most of your debts. An alternative may be to file a consumer proposal to deal with your debts rather than bankruptcy. With a consumer proposal, you will agree to payment terms with your creditors, including the federal government, for your student loans, up front. This eliminates any surprises at the end.

As we noted earlier, student loans are not automatically discharged in a bankruptcy or eliminated through a proposal if they are less than seven years old. However, it is sometimes possible to obtain relief from student loans less than seven years old through a proposal with the specific agreement of the student lender. It must formally agree to the terms in the proposal.  If it fails to vote but your proposal passes with the approval of your other creditors, this is not enough and your student debt, if less than seven years old, will remain.

As you can see, while the seven-year rule seems simple, it can be quite complicated. It is very important that you fully understand through discussions with your Licensed Insolvency Trustee prior to filing if your student debt will be eliminated under any proceedings under the Bankruptcy & Insolvency Act.

J. Doug Hoyes
J. Douglas Hoyes, B.A., C.A., CPA, CIRP is a Licensed Insolvency Trustee and co-founder of Hoyes, Michalos & Associates Inc. in Ontario, Canada. He is also the host of Debt Free in 30, a weekly podcast about how to handle money and debt.
J. Doug Hoyes About J. Doug Hoyes

J. Douglas Hoyes, B.A., C.A., CPA, CIRP is a Licensed Insolvency Trustee and co-founder of Hoyes, Michalos & Associates Inc. in Ontario, Canada. He is also the host of Debt Free in 30, a weekly podcast about how to handle money and debt.


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