If you read our Understanding Student Loans – Part 1 article last week, you already know the basics. Provincial and Federal Student loans, are different from other types of debts because at least 7 years needs to pass since your studies ended before these debts can be eliminated automatically by a bankruptcy or a consumer proposal. In this article, we will discuss insolvency debt relief options for all types of student loan debt.
Student loan debt takes most borrowers a long time to repay. Rarely is a loan repaid within a few years of completing school. In a 2014 Statistics Canada study of graduates from the 2009/2010 post-secondary year it was reported that; “…three years after graduation, across all levels of education, at least one-third of graduates with student debt had paid off their student loans…”. This means that the other two-thirds of borrowers were more than likely locked-in for much longer repayment terms and probably financially unable to repay any faster. During repayment things can happen in life that may result in your inability to pay your debts as agreed, such as job loss or illness. For borrowers who are unable to repay student loans quickly have an increased chance of a hiccup along the way which can delay the repayment even further; and in cases where repayment has become impossible, insolvency proceedings may be the only way to escape financial distress.
When Student Loans are Discharged in Insolvency (Bankruptcy or Consumer Proposal)
Permanent relief from government student loan repayment is available three ways:
- Bankruptcy where at least seven years has passed since you last attended school.
- Consumer proposals where at least seven years has passed since you last attended school.
- In bankruptcy where you are successful in applying to court under the hardship provision where it has been at least 5 years since you last attended school.
For borrowers who are interested in making an application under the hardship provision you must file for bankruptcy after the expiration of at least 5 years since your full or part-time studies ended. At the court hearing the court may grant an “early” discharge of the student where it has been demonstrated to the court that you have made “good faith” attempts to repay your student loans in the past and that financial difficulty has or will continue to inhibit your ability to repay your debts. If the court is satisfied with your application, your student loans may be discharged. The success of this application is not guaranteed and can result in student loans continuing to survive after the bankruptcy if your application is denied by the Court. Another hurdle for this application is the cost associated with hiring a lawyer.
When Student Loans are not Discharged in Bankruptcy or Consumer Proposals
If it has been less than 7 years since you have been a student and you are struggling with your debts you still have options available to you to resolve your financial difficulties. Although a bankruptcy or consumer proposal will not discharge your student loans it will serve to clear away all your other debts. When all other liabilities have been discharged after successfully completing the bankruptcy or proposal the repayment of the student loans can become manageable again.
Student loans not issued by the federal or provincial government may also be challenging. Loans of this nature are often issued to doctors and lawyers in combination with government student loans. The government has a specific loan forgiveness program for family doctors and nurses which you can learn more about here. Addressing bank-issued student loans may require the advice of a Licensed Insolvency Trustee, as your creditor may object to your release from this debt in a bankruptcy proceeding. While these loans do not have special rules like their government counterparts, there have been court cases where a bank has successfully argued that a portion of the debt be repaid and the bankruptcy remain in place.
In any event there are definitely benefits to insolvency proceedings for borrowers in financial distress, including:
- An end to calls and threatening letters from collectors.
- The return of withheld government benefits such as income tax refunds and child tax benefits (if non-payment of student loans occurs it can result in the loss of these funds).
- Having a portion of your student loans paid as a dividend from the bankruptcy or proposal process thus resulting in less owing at the end of the process
A break in collections activities will result in your other debts being cleared up which will put you in a better position to resume payment at a later date. You can also choose to make voluntary payments, if you know your debt will survive, or apply for repayment assistance to stop additional interest while you complete your proposal or bankruptcy.
Getting out of debt with student loan obligations may be a little different, but it isn’t impossible. We can help get you back on track. Let’s have a conversation about your options, you may be surprised to learn how many you have!