Student loans are similar to all unsecured debts: they can be eliminated in a consumer proposal. However, there are special rules that apply to government guaranteed student loans.
Specifically, section 178 (1)(g) of the Bankruptcy & Insolvency Act states that the following debts are not automatically discharged in a bankruptcy or consumer proposal:
- 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
o (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 o (ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student; or
- (h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g).
These same rules apply whether you are filing a consumer proposal or a bankruptcy in Canada.
What It All Means
For those of you who are not lawyers, here’s the translation:
- If you have been out of school for more than seven years, your student loan will be eliminated in a consumer proposal.
- If you have not been out of school for more than seven years, your student loan may not be automatically discharged, even if all of your creditors accept your consumer proposal.
Here’s an example: If a former student had $25,000 in debts (say $15,000 in credit card debts and a $10,000 Canada student loan that was six years old), they could file a consumer proposal. If more than half of the dollar value of the creditors accepted the proposal, the proposal was accepted. However, the student loan is not discharged because it is six years old, not more than seven.
The only exception to this would be if the student loan lender specifically agreed to the discharge of the student loan as a term of the proposal. If they simply don’t vote, the other creditors can approve the proposal, but the student loan continues to exist.
To reiterate: A former student's student loans, if less than seven years old, will only be discharged in a consumer proposal if the student lender specifically votes in favour of the proposal.
Using our example above, if $15,000 in credit card debts voted in favour of the proposal, but $10,000 in less than seven year old student loans voted against, the proposal would be accepted, but the student loans would not be discharged. At the end of the proposal, the debtor may still be liable for the student loan debts.