Student Loans: The 7-Year Rule Explained


Category: Personal Bankruptcy (4) comments

One of the most complicated areas of bankruptcy law is the rules surrounding bankruptcy and student loans.

Almost everyone by now knows that there is a 7-year bankruptcy rule for student debt. This rule has been around since 2008, but is commonly misunderstood.

student loan bankruptcy 7 year rule

The Bankruptcy and Insolvency Act, specifically section 178. (1) (g), states that you cannot be released from loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or similar provincial legislation:

(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student;

In plain English, what that actually says is that in order for you to be released from your student loan you must have been out of school for at least 7 years. If you have been out of school for seven (7) or more years and then file a bankruptcy or a consumer proposal, then the loan is a normal unsecured creditor and can be cleared by the bankruptcy or proposal.

Some other things you should know:

  • Out of school means when you last left school. That means the end of your last full or part time course.
  • It has nothing to do with how old your student loans are. If you go back to school, even part time, and pay for this on your own, you could start the 7 year waiting period all over again.
  • This rule also to a consumer proposal, as well as bankruptcy.
  • The waiting period can be shorted to five (5) years if you can prove financial hardship under the Act, but this requires you to go to court and convince a bankruptcy judge that you are suffering financial hardship.

Regardless of the specifics, declaring bankruptcy with student loans raising questions and concerns about what is the right course of action.

If you are struggling financially and have student loans, talk to a Licensed Bankruptcy Trustee about your “end of study date”, and what you can expect if you file a bankruptcy or a consumer proposal.

Leave A Comment

  1. Edward

    I have a question regarding the 7-years rule. I finished post secondary education in 2015 and filled for bankruptcy (credit card debt) in the same year. The student loan was of course not discharged. Because I am underemployed and in precarious financial situation, I am thinking to apply to court to discharge the student loan under the hardship provision at the 5-years mark.
    However, I am taking now free English classes for immigrants funded by Citizenship and Immigration Canada (https://issbc.org/our-resource/register-for-linc) and I was wondering if this classes are considered ‘return to school’ and they are resetting the clock under the bankruptcy law. Thank you!

    Reply
    1. J. Douglas Hoyes

      Hi Edward. The case law is inconsistent on this point. In some cases the court will decide that since you are not getting a student loan for your English classes the clock is not reset. Other cases have determined that since you are a student, the clock does reset. You have three options:
      1. You could make the application to court yourself and see what the court says
      2. You could consult an insolvency lawyer and have them make the application for you (although they will charge a fee).
      3. You could wait until 7 years is up and file another bankruptcy, or a consumer proposal.

      Hope that helps.

      Reply
  2. Edward

    Thank you so much, J. Douglas Hoyes, your answers were really helpful. Now arises for me another question. You may move it on another topic if it doesn’t fit here and maybe it is helpful for other readers.

    I filled for bankruptcy in 2015, just right after completing education, and the student loan was not discharged. Now in 2019, my credit score looks good (725 on Equifax), I think because I am using a secured credit card on a daily basis. Will my credit score be lowered again by applying to court to discharge the student loan under the hardship provision ? I am worried to not be able to rent a place to stay in the future. Thank you !

    Reply
    1. J. Douglas Hoyes

      Hi Edward. As a general rule, no, student loans are not reported to the credit bureau, and since the bankruptcy has already happened it is unlikely that a court application will be reported to the credit bureau. Good luck with your hardship application!

      Reply

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