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Insolvency and Student Loan Debt – The 7-Year Rule

Student Loans in Insolvency Proceedings

When someone files paperwork with a Licensed Insolvency Trustee (LIT) to protect themselves from their creditors, either by filing a bankruptcy or a consumer proposal, that protection includes a legal Stay of Proceedings that kicks in once the filing occurs. This legal Stay stops all unsecured creditors from initiating (or continuing) any sort of action to collect on the debts owed to them. That means garnishments of paycheques end, bank account freezes are lifted, and any court action ceases.

All unsecured debts existing at the date of the filing of the bankruptcy or proposal are included in the insolvency proceeding. However, once a bankruptcy or a consumer proposal is complete, there are some debts that will not be released and will survive the process as per the BIA (Bankruptcy and Insolvency Act).

This includes any debt or liability arising out of a fine or restitution order imposed by a court, fraud or embezzlement, spousal support and child support, bodily harm or sexual assault, fraudulent misrepresentation, or any loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or any provincial loans to students (such as OSAP). Of all these debts, only student loans have a time period associated with them. To be specific, student loans cannot be discharged if the Bankruptcy or Consumer Proposal was filed within seven years after the date on which the bankrupt ceased to be a full- or part-time student.

What Is The 7-Year Rule?

According to Section 178 (1), the 7-year period begins ticking away when the person ceases to be a full or part-time student. However, the case law is not conclusive on precisely when someone finishes their study program. To complicate matters further, the Ontario Student Assistance Program (OSAP) decides whether the student loan debt is dischargeable or not by counting from the “last date of study” in their system, which may differ from the date the student thinks they ceased to be a student. This last date of study is updated by OSAP every time a person is granted interest relief or returns to school, regardless of whether new student loans are granted. If you have been out of school more than seven years but used interest relief to assist you during that time period or took on a new loan later, you are encouraged to contact OSAP to determine your last date of study in their system prior to filing a bankruptcy or consumer proposal.

The above provisions only apply to student loans granted under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Apprentice Loans Act, or any provincial law that provides for loans to students. If you financed a private loan through a financial institution (such as a bank or credit union) then that debt would not survive a bankruptcy or a consumer proposal, even if the funds were used by a student to pursue a post-secondary education.

The Hardship Clause – A Helping Hand

There IS some good news, however! If more than 5 years has lapsed since someone has ceased to be a full- or part time student, they can make an application to the bankruptcy court to ask for a discharge of the student loan even though the 7-year time period has not been reached. The case law on this process suggests that the person must show the court, among other things, that (1) they acted in good faith regarding their student loan and (2) they will continue to suffer financial hardship if the student loan is not discharged. If someone was in a program where the expectation of a reasonable post-graduation income was anticipated but the graduate was unable to find a job in their field, the court will take this into account when they make their decision. Most people engage legal counsel, such as an insolvency lawyer, to represent them during this process.

If you are struggling with student loan debt and you think you have been out of school for seven years or more, please CLICK BELOW TO ARRANGE A FREE CONSULTATION, or give us a telephone call today. Our licensed professionals would be happy to sit down with you and discuss your options.