If you’re looking to find relief from your student loan debt, you might have considered filing for bankruptcy. 

While filing for bankruptcy can help you find a way out of debt, it may not be the most appropriate option if you have student loans.  

There are limited options to discharge student loan debt completely, especially if you were recently a student. 

Debt Relief for Student Loans 

If you have student loans, it is crucial to understand that they are not treated like other loans when you file a consumer proposal or bankruptcy.

When you consider bankruptcy, you are looking for a way to find relief from all your debts, so that you have a chance at a fresh start. However, bankruptcy may not help you, if you have government-guaranteed student loans.

If you have student loan debt and have been out of school for less than seven years, filing for bankruptcy will not necessarily discharge your student debt. 

Student loans can be included in a bankruptcy or consumer proposal, but it may depend on several factors such as: 

• How old are your student loans
• How long have you been out of school 
• If the student debts are government-guaranteed loans
• Your income and your living expenses
• Other debts you may have

Whether you consider filing for a consumer proposal or bankruptcy, it is vital to seek professional advice to see if your student loan debt can be discharged.  

The seven-year rule

If it has been more than seven years since you were a student, your student loans can be included in a bankruptcy filing or a consumer proposal. In this case, student loans can be discharged together with your other debts. 

However, if you have been out of school for less than 7 years, government-guaranteed student loans may not be eligible for discharge.

There is, however, a financial hardship provision that you can apply for if you have been out of school for at least five years. 

Financial Hardship for Student Loan Debt

The financial hardship provision allows those who are applying for bankruptcy or making a consumer proposal to have their student debts included in the proceedings. 

This will apply if you have been out of school for more than five years but less than seven years, and your student loan debts otherwise would not be discharged with your other debts. 

If it has been only five years since you stopped being a student, and you are or have been bankrupt, you may apply for an early discharge of your student loan debts under the “hardship provision.”

It is important to note that it must be five years since you stopped being a student, not how old the loan is. If you went back to school, part-time or full-time, this might affect your eligibility for the hardship provision. 

Do I qualify for the hardship provision for student loans? 

When you apply for financial hardship along with bankruptcy, you are asking the court to lower the seven year rule to five years. 

The courts are looking to satisfy the following two conditions to judge if you qualify for the hardship provision:  

• If you “acted in good faith” when you took out the loan, and when repaying your student loans; and
• If you experienced, and will continue to experience, financial difficulty in repaying these debts.

Simply, this means that you tried your best to make your loan payments, but due to your financial circumstances you were not able. 

How can I show financial hardship? 

Each and every case is decided individually. Everyone has a different set of circumstances, and if you apply for the financial hardship provision, your case will be considered based on your individual financial situation. 

The courts may consider a variety of factors when considering if you “acted in good faith,” such as: 

• How you used the student loan money,
• Whether you attempted to repay the loans, for example, using the federal government’s Repayment Assistance Plan, 
• If you made an effort to complete the educational program.
• Your current income
• Your living expenses 
• What other debts do you have
• Whether your student loans are the source of your financial difficulty

The hardship provision is generally granted if repaying your student loan debt is causing you financial difficulty. For example, if you are unable to meet your living expenses due to your student loan payments, the courts will consider this in your application. 

Each case is treated separately but these guidelines can help provide some clues on how the courts may treat your case if you  apply for the hardship provision. 

How do I file for financial hardship when I owe student loans?

You would typically apply for the hardship provision after you apply for bankruptcy. 

It is up to the courts to decide if you qualify for a hardship provision for the student loans. The applications are considered on a ​​case-by-case basis, each on their own merit, to see if they qualify for the financial hardship provision for student loan debt. 

While you can legally apply for the hardship provision yourself, it is essential to seek professional advice when considering a bankruptcy filing, especially if you want to discharge your student loans. 

If you are one of many Canadians struggling to pay your student debt back and are considering solutions to clear the debt, such as a bankruptcy, our debt experts at EmpireOne Credit are here to help.

Our team can help you navigate your options to find relief from student loan debt and set you up for a better financial future. Contact us for a free consultation.