Finding relief from student debt: Your options through bankruptcy or a consumer proposal

Many Canadians leave post-secondary school with significant student loan debt — often alongside credit card or line of credit debt used to cover basic living expenses while studying. For some, financial pressures force them to leave school before completing their program. Others graduate with the hope that steady employment will make repayment manageable.

But in today’s economic climate, shaped by inflation, rising interest rates, and a high cost of living, that manageable debt can quickly become overwhelming.

If you’re feeling stretched thin and unsure how to move forward, you’re not alone. And more importantly, you have options. Bankruptcy and consumer proposals may offer a path to relief, but there are some important rules to understand when it comes to student loans.

How long do you have to wait before student loans can be cleared?

In Canada, federal and provincial student loans can be automatically discharged through bankruptcy or a consumer proposal only if more than seven years have passed since you were last enrolled as a full- or part-time student.

If it has been less than seven years, your student loans typically remain your responsibility, even if your other unsecured debts are reduced or eliminated.

However, if it has been at least five years since you left school, you may be able to ask the court to have your student loans discharged early due to financial hardship. To be eligible, you must show that:

• You acted in good faith during the repayment period
• You’re experiencing ongoing financial difficulty
• You’re unlikely to be able to repay the loan in the future

This isn’t an automatic process, as it requires a formal application and approval by the court. A Licensed Insolvency Trustee can help assess whether this option is worth pursuing in your situation.

What if your student loans are less than seven years old?

Even if your student loan debt cannot be discharged yet, filing a bankruptcy or consumer proposal may still provide meaningful relief:

• Payments on your student loan are paused during this process
• Other unsecured debts, such as credit cards and lines of credit, can be reduced or eliminated
• You may be in a better position to manage your student loans once your overall debt is reduced

Can you file while still in school?

Yes. You can file bankruptcy or a consumer proposal while enrolled in a program. However, any student loans you receive during your current enrollment period will not be eligible for discharge.

Key things to keep in mind

• The seven-year rule is based on the last date you were a student. Earlier schooling doesn’t count if you returned later, even without taking new loans.
• Returning to school resets the clock. Any time you go back to school, the seven-year countdown starts over from the end of your most recent program.
• The five-year rule is only an option through the courts and requires proof of financial hardship.
• Student loan payments are paused during the insolvency process, even if they aren’t discharged.
• A Licensed Insolvency Trustee (LIT) can confirm your eligibility and explain the options available to you.

Student debt can feel like a heavy burden, especially when combined with the pressure of today’s rising costs. But financial difficulty doesn’t mean failure. Bankruptcy and consumer proposals exist to give people a chance to reset, recover, and rebuild.

If you’re not sure where to start, speaking with a Licensed Insolvency Trustee can help you explore your options and get the clarity you need. Contact us for a Free Confidential Consultation. We’ll help you understand how your debt is managed in a bankruptcy or proposal and provide you with a clear plan to move forward.