Is Bankruptcy The Answer to Student Loan Debt

April 2nd, 2019

Student debt is increasingly becoming a problem in Canada. Tuition fees in most provinces continue to rise at exponential rates, requiring students to take out loans. Many students in Ontario rely on the Ontario Student Assistance Program (OSAP) to afford their post-secondary schooling. The problem is, it can take years or even decades to pay off student debt, which can be a real burden for graduates.

About two-thirds of students graduate with an average debt of around $22,000. That is a lot of people with a lot of debt, most of who will be starting entry-level jobs that do not pay much. It can take time to work your way up in your career before you see a significant increase in your paycheck. In the meantime, student loans are still there with interesting piling on as well.

While many Canadians can successfully pay off their student loans, some struggle to make a significant dent in it. For them, it might be necessary to take added measures to eliminate their debt, which is why some consider bankruptcy.

Discharging Student Loan Debt With Bankruptcy

The Canadian government established the Bankruptcy Insolvency Act (BIA) to give people a way to find relief from their debts. It is typically used to alleviate credit card, personal loan, and lines of credit debt. Student loans once used to be treated the same as these debts but are now being treated differently under the BIA. Current legislation requires consumers to be out of school for seven years before their student loan debt can be discharged through their bankruptcy. .

Seven-Year Waiting Period

The seven-year rule refers to the length of time an individual must be out of school before their student loans can be discharged by bankruptcy. This date is the last day you were registered as a student, also known as the end of study date, and not the last day you were in class. You can contact the National Student Loan Centre (NSLC) to find out what your exact study end date was and when your student loan debt can be eliminated through bankruptcy.

Even if you’re student loan debt is not automatically discharged through a bankruptcy, you still have another option under to have them discharged. The BIA allows you to make a separate application to court after you have received your discharge, as long as it has been five years from your end of study date. The court will consider two things when reviewing your application to extinguish your student loan debt;

  1. Have you been acting in good faith in connection with your student loans; and
  2. Are you likely to continue to experience financial difficulty in the future to the extent that you cannot pay your student debt.

If you meet both of those conditions, the court will likely extinguish the student loan debt.

Dealing With Debt

If your student loan debt is from less than seven years ago, there are still options available to you to make your debt more manageable. First, you can contact your student loan office and negotiate a different payment plan. The NSLC has a Repayment Assistance Plan (RAP) you can apply for through your account online. Depending on your household income and other circumstances, you could get reduced payments or an increased grace period. Typically, you will have a grace period of six months after you graduate and, after that, monthly payments are based on paying off the loan in about nine years. Through RAP, you could extend your payment period up to 14 and a half years.

You may also consider a consumer proposal. A consumer proposal is a legally binding contract and arrangement with your creditors to settle the debt.

One of the hardest parts of paying back student loan debt for most people is managing other debt along with it. Even if your student debt cannot be discharged because it is less than seven years old, you can still eliminate other debt through bankruptcy. If you have other significant debts, then bankruptcy can still be a practical option for you.

If you need help managing your Ontario student loan debt or any other types of debt, call Paul J. Pickering and Associates Limited. Our firm provides one-on-one service in the London area, and all consultations are free of charge.