What Happens to Student Loans in Bankruptcy?
It is that time of year again when a new crop of new graduates are entering the workforce and when others start considering taking on a loan to pay for school in the Fall.
It is very common that a student who has finished a college or university program will have some amount of student debt. Sometimes, that amount can be significant and can be the source of stress and anxiety.
Student loans, as we define them, are those that are either directly from or guaranteed by a governmental body. If those loans fall into arrears, a debtor is left owing money to the government; and owing the government money has its own special consequences. For example, if you are in arrears for your student loans, the Canada Revenue Agency can begin keeping your annual income tax refunds and quarterly HST refunds. This can be a source of stress for individuals who depend on those refunds.
So what about the honest but unfortunate debtor who needs to file for bankruptcy or a consumer proposal while owing student loans? Student loans have some unique provisions for how they are dealt with in bankruptcy.
Once upon a time, it was a trend for students to borrow large student loans in order to get an education but file for bankruptcy immediately after graduation in order to take advantage of the bankruptcy system. So, the Government got wise to that idea and implemented a ten-year rule in 1998 which was later reduced to a ‘seven-year rule’ in 2009.
If you have been a full- or part-time student in the seven years prior to your bankruptcy or consumer proposal, you will not be discharged from a student loan and payments will resume as soon as you are done.
However, there is some potential relief if your student loan is caught by the seven-year rule. If you have filed for bankruptcy or a consumer proposal and it has been five years since you have been a student, you can make a “hardship” application to the Court to have your student loan discharged.
If you can demonstrate to the Court that you have acted in good faith in respect to the student loan and you will continue to experience financial difficulty, the Court can grant an Order discharging the debt in full.
The strictest reading of the Bankruptcy and Insolvency Act does not specifically deal with the person who borrowed money for school a long time ago, didn’t finish paying off that loan, and then returned to school more recently.
In New Brunswick, the seven-year rule applies to different loans for different education periods separately. This means that if you have a student loan from a program that was from more than seven years ago and a completely different student loan from more recent studies, the older loan can be discharged in a bankruptcy or consumer proposal.
Student loans give access to education to people who may not be able to otherwise afford it. But taking a student loan is a special financial commitment and students should know what they are getting into, if not before they accept them, certainly before they start building a career to pay them back.