Student Loans in Bankruptcy – The Conclusive Guide
Knowing how your student loans will get impacted if you file bankruptcy is an important question. Student loans are special in that they are treated differently than your regular unsecured debts. How they get handled depends on how long you have been out of school. The general rule is that if you’ve been out of school for at least seven years than your student loans can be included in bankruptcy and restructured. In the event your student loans are less than seven years of age you can still file. There are certain considerations that must be taken into account though. Whether you have national or nova scotia student loans they both fall under the 7-year rule.
Will my Student Loan Survive my Bankruptcy?
If you have not been out of school for at least 7 years your student loans will survive bankruptcy. What this means is that at the end of your bankruptcy you will still have the student loan. In the event you are worth something in a bankruptcy, your student loans will get a portion of the money you pay into your bankruptcy. For example, if your student loans equal 25% of your debt, they will receive 25% of what you pay into your bankruptcy, minus the bankruptcy costs.
During the term of your bankruptcy, you are not required to make payments towards the principal amounts. However, interest will continue to accumulate during the term of your bankruptcy. Generally speaking, the student loan offices will allow you to continue to make these interest payments if they receive permission from your Trustee.
Student loans are governed by section 178 of the Bankruptcy and Insolvency Act. This section of the act specifies special types of debt that will survive bankruptcy or in the very least be treated differently. Other examples include debts such as those you obtained through fraud or misrepresentation.
Can I pay down my student loans in bankruptcy?
In the event your student loan survives your bankruptcy you may be able to continue making payments on the student loan. If you obtain permission from your trustee to make payments onto your student loans you can usually increase payments past the interest-only amount. While we strongly encourage our clients to make at least the interest payments we believe putting the extra funds towards an emergency fund rather than paying down the student loan.
Are Student Lines of Credits the same as Student Loans?
No – Student lines of credit are not the same as student loans. Student lines of credit are treated no differently than any other unsecured debts such as personal loans, credit cards, payday loans, etc. However, student lines of credit are often cosigned. In the event they are cosigned you must pay particular attention to how you deal with the debt. Expert advice should be obtained. If the debt is not co-signed it will be eliminated by the bankruptcy the same as other debts would.
To make sure it is clear – there is no 7-year waiting period for student lines of credit.
What happens if my Student Loans survive my bankruptcy but I still cannot afford it?
If you find yourself having to file bankruptcy but are still not able to tackle your student loan there is a hardship provision that can help. This hardship provision allows you to apply to the court system to have your student loan erased, even if it doesn’t meet the 7-year rule when you file bankruptcy. There are many variables that come into whether this makes sense or not. We highly recommend engaging the services of an insolvency lawyer if you intend to pursue this option.
My situation is different – what do I do?
If your situation is different and are not sure how your student loans in bankruptcy would be treated we highly recommend that you reach out for professional assistance. Every situation is unique and there are always exceptions to every rule. If you have attended school in the last 7 years but did not use student loans during that period you may be able to eliminate your student loans in bankruptcy. In saying that – there are significant risks associated with this. Not every Trustee agrees with this and of course, student loans themselves would prefer this did not occur.
This article was written by David Moffatt. A Senior Debt Relief Specialist with 4 Pillars Halifax. 4 Pillars has assisted in creating plans that have helped save Canadians over $1 Billion dollars of consumer and tax debt since 2002. We believe that no consumer should have to struggle with the stress of overwhelming debt. Our debt restructuring plans can help you cut your debt by up to 80% with less than 3% of our clients ever getting into deep financial difficulties again. If you are struggling with debt please reach out. It hurts to continue to suffer financially.