When a person files a bankruptcy or proposal, a legal stay of proceedings stops all unsecured creditors from starting or continuing any action to collect the debt. This includes student loans.
Generally speaking, all unsecured debts existing at the date of the filing of the bankruptcy or proposal are included in the insolvency proceeding; however, certain debts are not released and will survive after the bankruptcy or proposal is completed.
The 7 Year Rule
One of the types of debts that survive is certain government student loans. Section 178(1)(g) of the Bankruptcy and Insolvency Act (“BIA”) provides that 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 loans to students, are not released by a bankruptcy or proposal when the person ceased to be a full- or part-time student within 7 years of the date they filed their bankruptcy or proposal.
According to this section, the 7 year period starts when the person ceases to be a full or part-time student. However, the case law is not conclusive on precisely when a person ceases to be a student. Also, we understand that 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 when 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 or not new student loans are granted when the person returns to school. Students or former students are encouraged to contact OSAP to determine the “last date of study” in their system prior to filing a bankruptcy or proposal.
The Hardship Clause
If more than 5 years has lapsed since the person ceased to be a full- or part time student, the bankrupt (or proposal debtor in the case of a proposal) may make an application to the bankruptcy court to ask for a discharge of the student loan even though the 7 year period has not lapsed. 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. Most people engage legal counsel to assist them with this process.
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. Therefore, private loans given by financial institutions outside of these Acts would not survive a bankruptcy or proposal, even if the funds are used by a student.
It is also important to note that, even though the stay of proceedings stops collection of the student loan, interest continues to accrue during the bankruptcy or proposal on any student loans that survive the bankruptcy or the proposal.