Today I'm joined by Daniel Veinot, partner at Waterloo, Ontario law firm Duncan Linton to discuss student loan debt forgiveness and how it is handled by bankruptcy law. Daniel has appeared in bankruptcy court many times on behalf of individuals looking for student loan debt relief. While every person's situation is different Daniel explains how bankruptcy law in general is applied to student loan debt. In particular he answers several questions:
- When are student loans automatically discharged in a bankruptcy or consumer proposal?
- How many years does an individual need to be out of school before bankruptcy can discharge any outstanding student loan debts?
- How does the court determine your end of study date for purposes of allowing your student debt to be forgiven by bankruptcy law?
- What is the hardship rule or hardship provision as it applies to student loan debt forgiveness early?
Student Loan Statistics
First some general information on student loan debt and bankruptcy in Canada. In May, 2015 we released our biennial Joe Debtor study which revealed that student loan debt is a growing problem in Canada. From that study we found that 13.4% of people who filed bankruptcy or a consumer proposal with us had student loan debt (up from 12.7 two years earlier). What's more, average student loan debt increased 4.3% over the past two years to just under $14,000.
Another scary statistic: 60% of student loan debtors are female (Jane Student) and women owe approximately $14,748 in student loans at the time they filed insolvency (19% more than their male counterparts). Although female student debtors are earning a slightly higher salary than male student debtors, we found that they are more likely to be out of work for reasons such as maternity leave, unemployment, disability or caring for family members; making their income less stable than Joe Student. This income instability, makes it difficult to pay of large student loans.
It gets worse: 26% of student loan debtors have a payday loan totaling $2,461 (compared to the average debtor at 18%) and one in four student debtors are single parents.
With this background in mind, we look at how bankruptcy law can help someone facing severe student debt and how these loans might be forgiven through bankruptcy legislation and the court.
The 7 Year Rule
Currently, bankruptcy law states that a government guaranteed student loan is only eligible for discharge if you have been out of school for seven years. Daniel clarified that the seven year rule becomes effective on the last day of the month that your term ended. This means that if you finished your term on May 15th, your end of study date could actually be May 31st.
It's also important to know that this rule only applies to government guaranteed student loans, not private loans like an unsecured student line of credit from the bank or credit card debt accumulated while you were a student. Those debts are automatically discharged through a bankruptcy or consumer proposals.
The Hardship Rule & Early Student Debt Forgiveness
As part of section 178 of the Bankruptcy and Insolvency Act, there is an exception to the 7 year rule and it's commonly called the hardship rule. Under the hardship provision, someone who is bankrupt (or has filed a consumer proposal) can appeal to the court for early discharge of their student loans after five years of attempting to pay of their student debt. You can use this provision to apply for forgiveness of all or part of your student loan debt. This is a court process where you generally hire a lawyer to represent you.
Since this is a provision under the Bankruptcy and Insolvency Act you must have declared bankruptcy (or filed a consumer proposal) for it to apply. You can apply to the court while bankrupt, but in most cases individuals take advantage of this provision after their discharge to eliminate student debt that was not automatically discharged by their bankruptcy due to the seven year limitation. As Dan explains:
Most often we see it, the person's been discharged, a couple years down the road they're still having continued financial difficulty paying their day to day debts, let alone their student debts that, you know, continue to be with them cause they weren't discharged during the course of their bankruptcy.
To qualify for the hardship rule, Daniel explains that there are two things that the court will look for when making its decision:
- Good faith - was the money used for the purpose of the loan. For example, did you use it to pay for tuition, books or residence? If the loan was used to purchase a car or something unrelated to the cost of education, the court may not consider it to be in good faith.
- Continued financial difficulty - Did you complete your studies and were you able to find employment from it? The court will also look at whether you've made reasonable steps to pay back the debt (even before filing bankruptcy or a consumer proposal). You need to demonstrate to the court that you cannot make payments on your student loan debt due to specific circumstances such as limited income. For example, Daniel explains that students in an internship or who are required to take additional courses can sometimes make the case that their income will not be as expected for a certain period of time, leading to continued financial difficulty.
Daniel points out that the court has three options:
they can either grant the application, which means the student loans are discharged completely, or they can deny the application, which means the student loans are there in their entire amount, or they can adjourn the applications [and review the application again in the future].
Worried about your student loan debt?
My advice for individuals thinking about taking on student loan debt to attend a college or university is to be proactive about the debt itself. Make sure that you have a plan in place to deal with that debt before you take it on. Moreover, it's important to research your career prospects for the field of study that you're interested in. If your desired field is not thriving, it may be wise to modify your goals to be proactive about your future financial stability and your debt repayment plan.
If you have existing student loan debt and you're wondering whether it's eligible to be discharged in a bankruptcy or consumer proposal, contact a licensed trustee in bankruptcy to review your situation and go over options to deal with the debt.
Read the full transcript from our Student Loans and Bankruptcy podcast.
Resources Mentioned in the Show:
Confirming End of Study Date:
- Canada Student Loans: (888) 815-4514
- Ontario Student Loans: (807) 343-7260