Most Canadians who need financing to fund their post-secondary education rely on student loans. And while it’s appropriate to view student loans as an investment rather than an expense, they can become a burden after graduation.
If you’re facing overwhelming student loan debt, cutting back on discretionary spending might not be enough to improve your situation. Instead, you may need to consider a legal solution, such as bankruptcy.
In Ontario, personal bankruptcy can eliminate 100% of your student loan debt. However, whether your student loans are eligible for bankruptcy depends on two factors:
- How long you’ve been out of school, and
- Whether your loans were issued by governments or private lenders
While bankruptcy can help resolve your student loans, it’s wise to consider all your options, too. For example, an alternative to personal bankruptcy offered by the Canadian government is a consumer proposal.
The Licensed Insolvency Trustees at David Sklar & Associates can assess your situation and recommend the best solution to get your finances back on track.
Can you declare bankruptcy on student loans in Ontario?
Under the Bankruptcy and Insolvency Act (BIA), there are two conditions under which you may discharge a government-guaranteed student loan: The seven-year rule and the “hardship provision.”
Seven-year rule
Has it been at least seven years since you ceased being a full-time or part-time student? If so, you can eliminate your student loans through bankruptcy. This waiting period applies to both federal and provincial loans.
Suppose you’re considering filing for bankruptcy to discharge your student loan debt. In that case, it’s vital to know that you have satisfied the seven-year waiting period with certainty. To do so, you’ll need to calculate your “end-of-study date,” which is the latter of:
- The last day on the month from the date you stopped attending school, or
- The last day of the month when you wrote your last exams for your final semester
No matter your end-of-study date, it’s prudent to wait an extra 60 to 90 days to ensure seven years have passed, just to be safe.
If you need clarification on your official last day as a student, contact the National Student Loans Service Centre (NSLSC) or the Ontario Students Assistance Program (OSAP). Alternatively, you can seek help from a Licensed Insolvency Trustee.
You must satisfy the seven-year rule to avoid your student loans being ineligible for discharge through bankruptcy. However, you can still discharge other unsecured debts, like credit cards and payday loans.
Hardship provision
If your government-issued student loans are less than seven years old, they don’t qualify for automatic forgiveness via bankruptcy. However, you could include them through another route under the BIA: the hardship provision.
This process involves applying to the Court to receive a “court-ordered discharge” on your student loans. For your student loan debt to be eligible under the hardship provision, you must meet the following criteria:
- It’s been five or more years since you stopped being a full-time or part-time student
- You must prove to the Court that you’re experiencing severe financial hardship and are unable to repay what you owe
It may be challenging to convince the Court that you’ve done everything possible to settle your student loan debt. Here are some of the factors the judge will examine before making their decision:
- How did you spend the funds provided by your student loans?
- Did you work hard to complete your education?
- Did you make a serious effort to repay your student loan?
- Did you seek financial relief options offered by your creditors, whether the federal government or a private financial institution?
- Is the financial hardship you’re facing likely to continue long-term?
What if your student debt is less than seven years old?
If it’s been less than seven years since you left school, your government-issued student loans are ineligible for bankruptcy discharge. However, there are several avenues you can explore to find some financial relief.
Contact your federal/provincial student aid office to learn about your options. Depending on your situation, you could have your interest charges waived, your payment schedule extended, or your monthly payments lowered.
Apply for the Repayment Assistance Plan
The Repayment Assistance Plan (RAP) is a popular financial relief program that helps borrowers better manage their student loans. It’s a partnership between the federal and provincial governments. The NSLSC administers the program.
If you qualify, you’ll have the opportunity to reduce your monthly payment for up to six months. You can continue reapplying for the program for six-month periods until you’ve paid off your student debt. The total repayment period under RAP lasts 15 years.
RAP is divided into two stages. The first stage lasts for at least five years, during which the federal and Ontario governments will cover the interest charges on your loan.
Stage two begins if you’ve been on RAP for five years or ten years have passed since you started repaying your student loans. During this time frame, the governments will also cover all or a portion of your principal.
To be eligible for RAP, you must meet the following requirements:
- Your student loans must be in good standing
- You must be a Canadian resident
- Six months must have passed since you left school
You must also prove that you’re suffering financial difficulty.
Adjust your student loan payment terms
The NSLSC allows you to revise your student loan terms to better align with your finances.
For example, you can extend your loan term, which will enable you to make smaller monthly payments. The maximum payment period allowed is 14.5 years.
You can also make interest-only payments for up to 12 months or request a temporary reduction to your payment size.
How are private student loans treated under bankruptcy?
Private student loans are automatically discharged through bankruptcy, much like any other unsecured debt. These can be loans in the form of a student line of credit, a student credit card, or any other unsecured product. There’s no waiting period, and it doesn’t matter how old the debt is.
What Happens If I Have More Debt Than Just My Student Loans?
Filing bankruptcy allows you to eliminate all kinds of unsecured debts, in addition to any private student loan. As a result, it can be a valuable tool to rid yourself of crippling debt obligations and rebuild your credit from scratch.
Let’s say you cannot include your student loans in your bankruptcy. In that case, bankruptcy (or a consumer proposal) may still be a worthwhile solution for two reasons.
First, you can legally pause your student loan payments until you’ve completed the program. Second, once you’re discharged from bankruptcy, you’ll be in much better financial shape to repay your student loans.
Eliminate your student loan debt with the help of David Sklar & Associates
If your Ontario student loans are causing your grief, it’s time to take action to find a solution. If you wait too long, your student loans can end up in collections. And your creditors can even freeze your bank account and seize your wages.
Bankruptcy law doesn’t offer student loan forgiveness immediately after you’ve left school. However, it can still eliminate other unsecured loans competing with your student debts.
But while bankruptcy is a viable remedy for troublesome student loan debts, it’s not necessarily the right one for everyone. A consumer proposal may be a more practical alternative for your situation.
At David Sklar & Associates, one of our experienced Licensed Insolvency Trustees can review your current situation and explain all your debt relief options. We’ll always recommend the best solution based on your unique needs and goals. You can take all the time you need to decide how to tackle your debts – the power is always in your hands.
Contact us today to book a free consultation. We’ll get you started on the path to a brighter financial future!
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