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Can I Get Out of Student Loan Debt by Filing for Bankruptcy? 

Matthew R Harris Law P.C. Dec. 20, 2022

Student Loan Handwritten in A NoteStudent debt in Canada now surpasses $18.2 billion just in government-backed student loans. If you factor in private loans, the total will be much higher. The average federally-backed loan currently comes in at $26,075. It is estimated that roughly half of all students are forced to take loans to make it through their college/university years. 

After graduation and entry into the working world, more and more students are finding themselves being forced to consider insolvency or bankruptcy solutions to get out of their debt. In 2018, one in six insolvencies in Ontario, or 17.6 percent of the total, resulted from student debtor filings. 

If you are underwater in debt related to student loans in or around Toronto, Ontario, contact Matthew R Harris Law P.C. There are options to discharge your student loan obligation or to reduce it to a manageable level that can relieve the debt burden you are facing, but there are restrictions and qualifications.  

Lawyer Matthew Harris will walk you through your options and direct you to a fresh start going forward. He also proudly serves clients in Hamilton, London, and Ottawa. 

Is It Possible to Discharge Your Student Loan Debt? 

The answer is yes, but it’s not a slam dunk. First off, you have to meet some time-limit qualifications. For a bankruptcy or consumer proposal, you must wait seven years from the date when you finished your education to petition for relief.  

Calculating the seven years can be tricky. For instance, if you still had to submit papers or take tests after your last day in class, that can extend the date. If you petition using the date of your last class attendance when you still had educational obligations to meet, you may find your petition being disapproved, even if it’s just a matter of a few days’ difference. 

If you file bankruptcy under the federal Bankruptcy and Insolvency Act (BIA) and you meet the seven-year qualification, your student debt can be discharged when the bankruptcy is over. Remember, however, that bankruptcy may also involve the sale of assets you own to help pay creditors.  

A consumer proposal is another option to first lower your debt obligations and then be discharged from all unsecured obligations, including your student loan. Under a consumer proposal, you submit a plan to creditors to lower the amount owed and offer an amount you are willing and capable of paying each month.  

The caveat here is that creditors can disapprove your proposal. In fact, for it to be approved, enough creditors must approve so that the aggregate amount owed represents 50 percent plus one of your original obligations. For instance, if you owe $100,000, enough creditors must approve your proposal to cover $50,001 of that original sum, though in a reduced amount. 

There is also a five-year option to qualify for an insolvency filing. For either a bankruptcy or consumer proposal after five years, the petitioner must ask for a court-ordered discharge under the hardship provision of the BIA.  

The judge will consider several factors in weighing your request, primary of which includes showing that you acted in good faith to repay your debt and that continuing to try to repay your loan will result in extreme financial difficulty. 

How Are Good Faith and Hardship Defined? 

If you’re using the five-year qualification for insolvency, hardship refers to the financial difficulties that you will have to face if you continue paying your student loan and other obligations. The BIA repeatedly uses the phrase “extreme financial hardship.” Extreme is never really defined, but it can be construed to mean you would be unable to meet the basic needs of life. 

Good faith rests on a consideration of several factors, including: 

  • How you used the loan funds – for education or recreation 

  • Whether you completed your studies 

  • Whether you attempted to use a government Repayment Assistance Plan or other resources 

  • Your current employment situation 

Experienced Guidance You Can Depend On 

If student debt obligations are weighing you down and causing you financial difficulties – or even hardship – then insolvency may be your door to a fresh start in life, but you have to keep in mind the seven- and five-year qualifying periods. For the five-year, you also must show proof of good faith and the prospect of ultimately being unable to repay the loan. 

If you’re in the Toronto area, contact Matthew R Harris Law P.C. for an assessment of your insolvency options. A consumer proposal can protect your assets while leading to an ultimate discharge of your student and other debts. Bankruptcy will lead to a quicker discharge but it may involve the sale of some of your assets to help repay creditors. Both are big decisions and should not be made without a clear understanding. Lawyer Matthew Harris will provide the detailed explanations you need.