Navigating the Complexities of Student Loans and Bankruptcy: A Guide to Financial Relief
You can get student loans discharged in a bankruptcy and consumer proposal depending on whether it has been more than seven years since you finished school. If you are struggling with student loan debt then you may want to consider all the available financial relief options. This can include the Repayment Assistance Program offered by the Ontario and Federal Governments or by filing a bankruptcy or consumer proposal.
Problems Repaying Your Student Loans?
You may have problems repaying your student loans for many reasons. One common reason is difficulty finding a job after graduation, leading to difficulty making loan payments. Another issue can be not fully understanding the loan repayment process and options available, leading to missed payments or default. Additionally, some of you may experience unexpected life events, such as a medical emergency or loss of income, which can make it difficult to repay student loans and other debts. If you're currently struggling with student loan payments, it's important to stay informed about your loan repayment options.
Filing Bankruptcy with Student Loans - What happens?
You may be struggling with your student loan debts and wondering if you file for bankruptcy, will your student loan debt be included?
Yes, you can have your student loans discharged in personal bankruptcy if you have finished being a student for at least seven years. Upon filing for bankruptcy, the Licensed Insolvency Trustee will notify all of your creditors, including National Student Loans for government-issued student loan debt.
If it has been more than seven years since you were a student, you will no longer be responsible for making monthly payments for your student loans upon filing for bankruptcy. Also, upon completing your bankruptcy, all student loan debt will be discharged. This means student loan collectors will no longer be able to collect from you.
However, if it has been less than seven years from when you finished school, then you will still be responsible for monthly payments during and after completing the bankruptcy. If you have finished school less than seven years ago, read on for more options to pay off your student loan debt.
Can Student Loans be Discharged in a Consumer Proposal?
Yes! Student loans can be discharged in a consumer proposal similar to personal bankruptcy. A consumer proposal is an agreement between you, the debtor, and your creditors, and provides an alternative to bankruptcy. The consumer proposal allows you to make a single monthly payment to the Licensed Insolvency Trustee, who then distributes the funds to your creditors. Click here to find out if a consumer proposal is right for you.
Similar to bankruptcy, the seven-year rule applies from when you finish being a student to determine whether your student loan debts will be discharged after completing the consumer proposal.
In a consumer proposal, all of your unsecured debts can be included, including student loans. During the consumer proposal, if the student loan debt is discharged, you won't be responsible for the monthly payments after completing it.
Student Loan Debt Under 7 Years Old - What are My Options?
If you are struggling with student debt and it's been less than seven years since you completed your studies, there are still options available for assisting you.
Repayment Assistance Plan
If you don't want to declare bankruptcy or file a consumer proposal, the Province of Ontario and the Government of Canada offer repayment assistance through the Repayment Assistance Program (RAP). This program is for eligible students having difficulty paying the student debt they owe by getting interest relief and debt reduction. It also provides an opportunity for students to begin the process of financial recovery.
The RAP is available for the following types of loans:
Canada-Ontario Integrated Student Loans
Canada Student Loans issued before August 1, 2000
Ontario Student Loans issued before August 1, 2001
Part-time Canada Student loans
There are two stages to this program. At the first stage, it can offer interest relief for up to 60 months or until you are 10 years out of school, whichever comes first. During this stage, you will make monthly payments based on your family income and size which will go towards paying your principal loan. If the payments are large enough then a portion will go toward the monthly interest. The Governments of Ontario and Canada will be responsible for paying the monthly interest not covered by your payments.
The second stage, debt reduction, occurs after you have received stage 1 relief for at least 60 months or have been out of school for 10 years, whichever comes first. During this stage, you will make either no payments or a monthly payment based on your family income and size. Similar to stage one, your payments will go towards paying the principal loan amount and the remainder towards interest. The Governments of Ontario and Canada will be responsible for paying the monthly interest not covered by your payments. In this stage, your debt should be paid off within a maximum of 15 years from completing school or a maximum of 10 years if you have a permanent disability.
To obtain financial relief from this program you must first apply to the program, by going here, Repayments Assistance Plan - Apply. It is also important to note that once approved the program only lasts for 6 months, after which you can re-apply.
The RAP can be a good option for students who are facing financial hardship and are unable to make their regular loan payments. It provides the opportunity to reduce the amount they owe, and begin the process of financial recovery.
Financial Hardship Provision
If you file for bankruptcy or a consumer proposal and it has been more than five years since you were a full or part-time student then you can make an application to the court for your student loan debt to be discharged. The court would then determine if the student debt should be discharged by being satisfied with the following per the Bankruptcy and Insolvency Act:
the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt, and
the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.
This means if you tried to make the payments on the student loan, but due to your financial circumstances you have been unable to pay it off. Also, if it were not discharged, it will continue to cause you financial hardship.
If you think you would qualify for the hardship provision you should discuss it with a Licensed Insolvency Trustee, who can help review if you would qualify. Suppose you plan to go ahead with an application to the court. In that case, you should hire a lawyer with experience in these types of applications to get the best result. This will be an additional cost you will need to pay separately from the bankruptcy or consumer proposal.
Note there are no guarantees that the court will accept your hardship application, so you must be prepared for your debts to survive if you don't meet the seven-year rule.
Private Student Loan Bankruptcy and Consumer Proposal
If your student loan is with a bank and not the government, such as a student loan line of credit or a student loan debt, you may wonder how it will be treated in a bankruptcy or consumer proposal.
These loans will be automatically discharged under the Bankruptcy and Insolvency Act through a bankruptcy or consumer proposal, as it is treated as other unsecured consumer debt. There are no special rules for this type of debt such as the seven-year waiting period from when you finished school which is required for government student loans.
What Happens If I Have More Debt Than Just My Student Loans?
If you're struggling with more than just student loan debt repayments, then getting some relief from student loan debt may still not be enough help. You should look at your student debt in comparison to your total debts owing. If it makes us up 20% or less of your total debt outstanding then getting financial relief for only your student loans may not be enough help.
If you obtain interest relief or debt reduction for your student loans and you're still having trouble balancing your budget, then you may want to speak with Licensed Insolvency Trustees. The Trustee can help you review your options such as debt consolidation, consumer proposal or bankruptcy.
A consumer proposal and bankruptcy can reduce all of your unsecured debts including Canada student loan debts. Click here to learn more about a consumer proposal vs. bankruptcy.
If you're struggling to make debt payments on your student loans or feel like they will never get paid off, you may want to review your options for debt relief.
You could first seek assistance through government programs such as Repayment Assistance Program. If that doesn't provide enough relief then a consumer proposal or bankruptcy may offer more relief. However, you must be mindful that your student loans have special protection where they may not be discharged unless you have finished school over seven years ago.
Litvack Group would happy to provide you with a free, no-obligation consultation to discuss your student loan debt and help find the right debt solution for you.