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.
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.