Student loans receive special treatment under the Bankruptcy and Insolvency Act in Canada. While bankruptcy laws generally are designed to give the honest debtor an opportunity to get a fresh start and get released from his or her debts, there are always exceptions. Student loans are one area that you need to fully understand before declaring bankruptcy or filing a consumer proposal for those debts.
Most student loans are government guaranteed which means that the local bank providing the loans is protected in the event the loan goes into default. In order to protect the government from a run on unpaid student loans, rules were added to Canadian bankruptcy law that state a student loan will not be covered or extinguished after bankruptcy or a consumer proposal if it has been less than 7 years from the last study date.
After this 7 year ‘waiting period’ however, if you still haven’t been able to earn enough income to repay your student loans, personal bankruptcy or filing a consumer proposal can be a good option.
It is important however that you confirm that you have been out of school for seven years. This is known as your 'end of study date'.
The rules can get quite complicated. Here is one example about what happens if you get the dates wrong.
Last Date of Study: Actual Case File
A few years ago, we met with Frank (not his real name) in our office in Vaughan. He had enrolled in a human resources course at Humber College. To pay for the costs of his books and tuition, like many, he took out a student loan. For a variety of reasons, Frank eventually decided to quit in his final year. That was about 7 years ago.
After leaving Humber, Frank was unable to find steady employment, and unfortunately started to rely on credit cards to help cover his ongoing living expenses. Now married with a young child, Frank was finding it increasingly difficult to keep up with his student loan payments and his credit card payments and realized that he was in trouble. He came in to see us for a free consultation and I reviewed with Frank what his options were given his current financial situation. He decided to proceed with the filing of a bankruptcy. We explained to Frank about the special treatment of student loans and he was sure that it was more than seven years ago that he was at Humber, so he was certain that the bankruptcy would allow him to get rid of all his debts including his student loans. Frank filed for bankruptcy, and after nine months he received his discharge.
About six months after his discharge, Frank called us up and said that he was getting calls from the government wanting him to start making the payments on his student loans. They were even threatening to take legal action. While Frank was confident that he left school more than seven years ago from the date of his bankruptcy filing, the government was saying that while he may have left Humber more than seven years ago, they were relying upon the completion date of the courses that he was enrolled in rather than when he left Humber. As it turned out, the government was correct, and Frank was still liable for his student loans.
The message to learn here is to never proceed with any formal insolvency proceedings without first verifying the exact last date of study according to the government records.
While Frank was disappointed, we suggested that he see if he can apply to bankruptcy court to have his student loan included in his initial bankruptcy filing. Frank had been conscientiously paying his student loans for many years and without completing his education, he just could not find a job earning enough money to support his new family. Fortunately for Frank, the bankruptcy judge sympathized with Frank’s personal situation and agreed to order that his student loans be covered in his bankruptcy.
Frank was lucky that this did resolve to his benefit. However, always confirm your last date of study not only with your trustee, but with your student loan records.
You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.