Student Loans: The 5-Year Hardship Provision

Category: Personal Bankruptcy (12) comments

As a follow-up to our post about how the 7-Year Student Loan Rule works if you file bankruptcy or a consumer proposal, we thought we would explain in more detail how a student can reduce the waiting period to five (5) years under certain specific conditions.

student loans bankruptcy hardship

Under the Bankruptcy & Insolvency Act, there is provision for a debtor to apply to have their student loans included in either their bankruptcy or consumer proposal if they have ceased to be a student for five years instead of seven.

Specifically subsection 178 (1.1) of the act states that after you complete your bankruptcy or consumer proposal you may apply to the Court to have the period reduced to five (5) years if:

(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and

(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.

What this means is that you must have acted in good faith in taking out and attempting to repay your student loans and you must show that you would experience undue hardship if you had to wait a further two years.

When considering ‘good faith’ the courts will look at how you used your student loans (did you use them to pay for school related costs or for having fun), did you work hard to complete your schooling and make every effort to repay your loans including using programs like the federal government’s Repayment Assistance Plan, and are you now working in a job that you acquired as a result of your education.

If other debts, such as high interest credit card debt, are part of your financial problems, you may be able to declare bankruptcy or file a proposal to eliminate this debt making it easier to repay your student loans. This can impact the Court’s decision to apply the 5-year exception. In general, they will allow a hardship exception only if repaying your student loan debt is causing the financial hardship. Each case is assessed on its own merits, so understanding how the Court may rule is best discussed further with a Bankruptcy Trustee.

Other factors to consider:

  • you will be required to apply to the Court to have your student loans discharged in 5 years instead of 7;
  • the time period is based on when you last ceased to be a student, not how old the loan is.

Whether you qualify for the 5-year or 7-year rule regarding the inclusion of your student debt in a bankruptcy or consumer proposal can be very complicated. We recommend you find a bankruptcy trustee in your area to consider your options.

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  1. Jenny S.

    I have been trying to figure out how to apply for the Financial Hardship Provision in regard to my student loan, but haven’t managed to. How do I apply?

  2. Jen

    Hi, I filed bankruptcy in 2017 (three months short of the 7 year rule) since I got my loans. The end date for that program I took was 2011. I’ve since gone back to university and paid for it myself, am I still eligible for the hardship clause?

    1. J. Douglas Hoyes

      Hi Jen. The answer will depend on how your local court interprets the “ceased to be a student” clause. Technically since you were recently in school, you have not “ceased to be a student” for the 5 years required for the hardship application. However, since the original student loan is now well over 7 years old, it is likely that the court will allow you to make a hardship application (although it is up to the court to determine whether or not to grant you the relief you request).

  3. deniz

    Hi, 2011 april was the time when I received my last student loan from OSAP. I have been living out of the country and on repayment assistance since 2012 and I haven’t been able make any payment since then. Which option would be the best for me to do while living out of Canada without coming back there. Hardship provision or bankruptcy ?

    1. J. Douglas Hoyes

      Hi Deniz. A hardship application is something you do after you file bankruptcy. To file a bankruptcy you are required to personally meet with a licensed insolvency trustee, so if you have no plans to return to Canada, bankruptcy likely isn’t an option. If you plan to return to Canada, and expect to have income in Canada, bankruptcy (or a consumer proposal) may be an option, but that would be a decision to make upon your return to Canada.

  4. Edward

    it is not very clear to me this paragraph «What this means is that you must have acted in good faith in taking out and attempting to repay your student loans and you must show that you would experience undue hardship if you had to wait a further two years.»

    I graduated in 2015, and filled for bankruptcy later in the same year. I had credit card debt in collection for many years and I wanted to rebuild my credit score.

    Now in 2019, I do not benefit from that student loan, and my financial situation is not so good. I want to include this student loan in the bankruptcy. What it means «if you had to wait a further two years» in this context ? What options do I have ?

    1. Ted Michalos

      There is a hardship provision in the law that allows student debt to be discharged in a bankruptcy after 5 years (the normal time period is 7 years), but hardship is not defined. Yo have the right to bring an application (motion) in Court to retroactively have your student loans included in the bankruptcy you completed in 2015, but there is no way for me to determine if the Court will agree you qualify for hardship. If I had to guess, unless you have some form of medical disability, you probably don’t. At the very least you’re still short of even the 5 year restriction. Consult with a lawyer if you want to investigate this further – good luck.

  5. Edward

    I understand that after 5 years I can apply to court under the hardship provision. What I am not clear here, does it make any difference if instead of 5 years, I wait 7 or more years and apply to court to have the loan retroactively discharged ?

    1. J. Douglas Hoyes

      Hi Edward. If you go bankrupt seven years after you have ceased to be a student, a government guaranteed loan is eligible for automatic discharge. After 5 years you can apply to bankruptcy court to have it partially or fully discharged. Waiting more than 5 years to apply under the hardship provision has the same impact; if the student loan was not discharged automatically, whether you apply for hardship after 5, 6 or 7 or 10 years doesn’t matter; at that point it’s up to the court to decide whether or not to discharge the loan, so it’s not a retroactive discharge.

      Of course if more than 7 years has now elapsed another option is to file a second bankruptcy (which has other implications, so the advice of a licensed insolvency trustee would be necessary before taking that approach).

  6. Nathan

    I’ve had an issue with my trustee but was still looking to file the 178(1.1) and was looking for a rough estimate on the cost of representation for doing so.

    1. J. Douglas Hoyes

      Hi Nathan. You would have to find an insolvency lawyer in your area; they would be able to advise you on any costs. It’s possible to represent yourself, but you would have to do a lot of research to know what forms and procedures are required; generally your trustee can also be of assistance with that process.


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