Can Bankruptcy Get Rid of Student Loans?

Student loans are a harsh mistress.  They give with one hand (and what a glorious hand it is when you are in school and that student loan balance magically pops up in your account), but then brutally take with the other!  Student loan debt is more or less the hardest debt to get rid of in Canada today.  You can declare bankruptcy and get rid of mortgage debt (you’ll likely lost the house, but at least you can “get back to 0”) , and even credit cards will usually let you off the hook at some point.  Not those pesky student loans though – like that D in your first year class (you know, the one on Friday mornings you never went to because getting out of bed before noon seemed like climbing Everest) they will continue to haunt you for a long time going forward.

Not a Great Corner To Be Backed Into

Now I should be clear in that bankruptcy isn’t an enviable option by any means.  Not only do you lose most of your possessions (when they are liquidated to pay your debts), but your credit rating is crushed for the foreseeable future.  This means that even if you do manage to get back on your feet, you will have ungodly amounts of interest to pay on a car loan or line of credit when you go to borrow money again.  That being said, bankruptcy was invented for a reason: to give people a chance to start fresh as opposed to being crushed under a debt burden for their lives.

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Student loans are almost impossible to get rid of for the very good reason that fraud would be such an attractive option to adults everywhere.  If you come out of your post-secondary education, had a $40K or $50K student loan (or triple that for our American neighbours) and don’t immediately get a well-paying job, simply declaring bankruptcy might look like a pretty solid option.  You would likely have no assets to seize, and with houses being so expense these days it’s not like you need to buy one of those any time soon.  Taking the one-time hit to your credit rating, while still keeping your education credentials and the accompanying employment prospects sounds like a pretty good deal to many students.  What many people fail to take into consideration when they look at the government’s hardline approach is that the various levels have already helped you out by paying the interest on your loan while you were in school (a considerable help), so now to get stuck for the whole bill (in addition to the amount they already subsidize your education with) would be a pretty deep loss.

Proving Hardship

So what does it take to get your student loans “erased”?  A whole lot…  First off, in Canada, the loans have to be over seven years old.  That means that if you graduated in 2012, there would be chance of your loans coming off the books until at least 2019.  Only in very selective cases of “hardship” (an extremely difficult status to attain) will that seven year period be shortened to five years.  Even after seven years if you declare bankruptcy, the government can still decide that you are stuck with those loans you took out a long time ago!

If five years have passed since your graduation date and you truly feel that bankruptcy might be your only way out, then you have to prove to the courts that you have tried to pay your loan in good faith and that if you are forced to pay the loan you will suffer severe financial hardship.  The court can then choose to do nothing, or they can force an individual to lower their standard of living in order to pay back some of the loan.  There are even documented cases of the courts requesting individuals to work harder at finding a job instead of merely accepting their unemployment.  If your income is at or below the poverty line, and you have a family to support, bankruptcy protection might be extended to you.

An American Comparison

In the USA the idea of “undue hardship” is fairly similar to that in Canada.  They even use the term “certainty of hopelessness” to describe the threshold that must be met in order to use bankruptcy protection.  This tough stance began in 1976 in order to stop the abuse that was taking place at the time.  While the laws have gotten even harder on people trying to prove hardship, it should be noted that people who fail to pay their student loans and instead meet the hardship threshold have been escalating quickly in the USA.  The ultra-high tuition that is the norm in some parts of the country is exactly the situation that Canada is trying to avoid.

Clearly the best option is to choose an educational path that leads to solid job prospects (a major problem in Canada today) and then try to limit the amount of student debt you take on if any at all.  In my very limited experience the government is willing to work with students who initially have a difficult time getting a job right out of school (see our student loan articles and the relevant information surrounding grace periods) using grace periods and such.  If possible though, try not to start out your adult life from behind the debt 8-ball (even though this is getting harder and harder to do).

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