Do I Need to File Bankruptcy For My Student Debt?

Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

student debt problems

According to the Canada Student Loan Program (section 4.3), the average student in Canada is graduating with more than $12,000 in student debt. That’s a pretty significant amount of debt to start out with in your early 20’s. Payable over a period of 9.5 years (extendable to a maximum of 14.5 years under certain circumstances) means that many graduates are still carrying student debt well into their mid- to late-30’s.  This is a long time frame during which things can go wrong. You may or may not find permanent employment in your field or at a reasonable pay; you may get married, have children and perhaps even divorce. These life events can lead to difficulty repaying your student debt, as well as the accumulation of other types of debt.  Your debt relief options depend on several factors, which we will outline below, including how old your student debt is and what types of additional debt you might be carrying.

Young Millennials – Just Out of School

If you are a recent graduate, your options for student debt help will depend on whether you owe:

  • Primarily government guaranteed student loans; or
  • Other unsecured debts including private student lines of credit.

If your only significant debts are government guaranteed student loans, you will have to rely on the government’s Repayment Assistance Plan (RAP) for relief. Under the RAP, student loan borrowers may qualify for student debt relief in the form of a reduction or a temporary deferral of monthly payments. Even the government is realizing that recent graduates are struggling under the burden of their debt payments. In 2013, the Canadian Student Loan Program made applying for help through RAP easier by launching a new online application process. This may be the reason why RAP usage among first year cohorts was more than 27% in 2013 (section 5.4). In 2013 alone, 209,000 Canadian student loan borrowers received support under the RAP, an increase of almost 13% from prior years.

Student debt relief under the Bankruptcy & Insolvency Act (BIA) is not an option for recent graduates due to legislative rules governing student debt. Under the BIA, student loans can only be discharged in a bankruptcy or consumer proposal if the individual has been out of school for at least seven years.

However, many new graduates are struggling with more than just Canada student loans. Our recent Joe Debtor study revealed that young millennials struggling with student debt are relying on other forms of credit to make ends meet, and much of this debt comes in the form of very expensive credit options. In fact, a full one third of all insolvent student debtors aged 18-29 are likely to carry at least one payday loan with an average balance of almost $2,300.  They also owe almost $10,000 in credit card debt and a further $13,000 in bank loans, lines of credit and other unsecured debts.

In these circumstances it may make sense to file bankruptcy or a consumer proposal to eliminate non-government student loans including your private student debt. Doing so may free up enough cash flow in your budget to allow you to keep up with your Canada student loan payments. You may also still apply under the RAP for student loan repayment assistance while dealing with your other debts.

Older Millennials and Gen X – Struggling While Raising A Family

This brings us to our next cohort – graduates who have been struggling to maintain their student debt repayments for several years, and for one reason or another, now find themselves unable to continue. From our study we know that this is the profile of the majority of the insolvent student debtors we see. In fact, 44% of all student debtors in our study were between the ages of 30 and 39. They also have the largest unpaid student debt balance at more than $14,800 because by now interest has accumulated and they have missed payments. While they may still qualify for assistance under the RAP, this is usually not enough. Raising a family, perhaps carrying a mortgage and often struggling as single parents, their investment in their education just didn’t pay off. Most are also carrying significant other unsecured debts that have accumulated since graduation.

For these individuals the solution is usually bankruptcy or a consumer proposal. They have been out of school for seven years or longer and qualify to have their Canada student loan debt included in their bankruptcy or proposal. Which option they choose depends not so much on what type of student debt they carry, but on other factors including their income and whether or not they own a home. The decision is not unlike any other person choosing between bankruptcy or a consumer proposal.

As you can see from the infographic below, the average student debtor is not someone who graduated yesterday and is looking for a way out of repaying their student debt. All are struggling not only with student debt, but also with other high cost debt. If you fall into any of these categories contact us to talk about your student debt relief options. You’re not alone in seeking help to deal with your student loans.

student debt help