Student Loans and the Bankruptcy and Insolvency Act

Posted in Personal Bankruptcy
Posted by Scott Schaefer, CPA, CA, CIRP - LIT

student-loans-bankruptcy-act-updatedGoing to post-secondary school can be an expensive investment. While the Federal and Provincial governments have student loan programs to assist students while attending school that do not require payments until sometime after schooling ends for some individuals the amount of student loans and other debts become unmanageable. When this happens they need debt relief options that can help them deal with overwhelming student debt.

Two possible student relief alternatives under the Bankruptcy and Insolvency Act include a consumer proposal or bankruptcy.

There are however special laws which apply to student debts when choosing either of these options.

Seven Year Rule

Section 178(1)(g) of the Bankruptcy and Insolvency Act (BIA) sets out that student loans through the government cannot be discharged unless seven years have passed from the time they ceased to be a student and the time they file personal bankruptcy (or a proposal).

What that means is that if you have ceased to be a student for at least 7 years then your student loans will be included in either a bankruptcy or consumer proposal and will be forgiven.

If however the student loan is less than 7 years old it will survive and be payable after the consumer proposal or personal bankruptcy is completed.

Temporary Relief From Collections

Even in your student loans do not meet the 7 year rule for forgiveness, the student loan lender cannot force collections while someone is in a consumer proposal or bankruptcy.

Sometimes this temporary payment relief, combined with the elimination of other unsecured debt like credit card debt or bank loans makes filing bankruptcy or a proposal a good alternative even for individuals whose student loans debts would otherwise not be included in any proceeding under the BIA.

Other Student Debt Case Law

A couple of interesting cases around student loans:

  1. In the Chenier v. Canada (Attorney General) it was found that the BIA provisions for student loans are not in violation of the Charter of Rights.;
  2. In the Pyke case it was held that a student ceases to be a full-time student on the last day of the month of Canada Student Loan Act eligibility, not the graduation date.
  3. Studies will interrupt the 10 year (now 7 year) period for student loans only if they are funded by government loans: Ledoux, Re (2005), 8 C.B.R. (5th) 225 (Sask. Registrar)

For individuals that have filed bankruptcy prior to the student loans being 7 years old and 7 years now have passed, there is a provision to request the courts to discharge the loans – this falls under section 178(1.1) of the BIA. The case law around this varies, so we suggest you call us to discuss.

eliminate student debt bankruptcy or consumer proposal