Canada Student Loan

What happens to my student loans if I file for bankruptcy in Canada?

If the burden of your student loan debts is causing you to consider bankruptcy in Canada, it is essential to learn about the special laws that apply to discharge of student loans, and how they affect your options.

Your predicament
You may be one of the large and increasing number of Canadians who felt forced to incur large student loan debts just to get through university or college.

Why did this happen? For decades, education costs have risen much faster than the inflation rate. Enormous debts forced governments to cut costs, and one casualty was grants for higher education. Universities and colleges were forced to raise fees, and students made up the difference by taking loans.

Consequently, many people suffer from some of the following problems. Are you one of them?

• Ability to get credit is severely affected
• Can't afford to move out of parents' home
• Can't get a car loan
• Can't make a living and get on with life
• Collection agency calling frequently
• Pay being garnisheed, or a threat to do so.

The laws for bankruptcy and student loans
Anyone filing for personal bankruptcy who has student loans must include them along with other debts.

But the main rule you must know is that student loans are not automatically discharged by bankruptcy, unless they are at least 10 years old. That is, you must have been out of school for 10 years. If this is your situation, bankruptcy may be your solution. But there are less drastic alternatives to bankruptcy, so we urge you to contact a bankruptcy trustee to make sure you make the best choice.

Various moves have been made in Parliament to reduce the 10 year period, but it is not known when a reduction will actually happen.

In November 2003, the Senate Committee on Banking, Trade and Commerce recommended that the 10 year period be reduced to 5 years. You can download a copy of the complete report here.

On April 13, 2005, a private member's bill to amend the Bankruptcy & Insolvency Act to reduce the discharge period for student loans from 10 years to 2 years was defeated in the House of Commons by a vote of 168 to 105.

In November 2005, Bill C-55 was passed, including these provisions for student loans:

• Reduction of the above waiting period from 10 years to seven years.
• Possibility for a bankrupt with student loans over five years old, to apply for the court to discharge the debt if the bankrupt has acted in good faith regarding these loans and will still be unable to repay them.

However, immediately afterward, a new government was elected, and the bill has not been proclaimed into law.

On October 29, 2007 the government introduced Bill C-12, designed to correct some technical errors in Bill C-55. Bill C-12 was passed by the House of Commons on October 29, 2007, and was then passed by the Senate on December 14, 2007. As of today, even though the Bills have passed, they have not yet been proclaimed into force.

In addition, because Bill C-12 was passed quickly, the Senate Standing Committee on Banking, Trade and Commerce continues to review insolvency legislation, and the Senate hearings will continue through March, 2008 and perhaps longer. It is expected that the new rules will not come into force until the fall or winter of 2008.

Bookmark this page and check back often, or for up to the minute changes please refer to Student Loans: Bankruptcy in Canada Blog for the current status of this proposed legislation. When changes are announced, we will update this page immediately. Meanwhile, read our blog postings on Student Loans: Bankruptcy, or contact a trustee today for a free initial consultation to review your options.