What Is It?
In Canada, student loans are treated differently from other unsecured debts in bankruptcy. Under the Bankruptcy and Insolvency Act (BIA), s. 178(1)(g), a student loan debt cannot be discharged (eliminated) in bankruptcy if you ceased to be a student less than 7 years before the bankruptcy filing.
After 7 years from the date you ceased to be a full- or part-time student, student loans can be discharged in bankruptcy like any other unsecured debt. A hardship exception under s. 178(1.1) allows discharge after 5 years in limited circumstances.
The 7-Year Rule
Key date: the date you ceased to be a student — not the date of graduation, not the date the loan was issued. If you took additional courses, returned for a second degree, or were enrolled part-time, the 7-year clock starts from when you were last a student.
Example:
- Left school permanently: May 2017
- 7-year mark: May 2024
- Bankruptcy filed: June 2024 → Student loans fully dischargeable
- Bankruptcy filed: January 2024 → Student loans NOT dischargeable (7 years not yet elapsed)
The 5-Year Hardship Exception
Under s. 178(1.1) of the BIA, a court may order that student loans be discharged even within the 7-year period (but after 5 years from ceasing to be a student) if:
- The debtor has acted in good faith with respect to the loan obligations
- The debtor has and will continue to experience “financial difficulty to such an extent that they will be unable to pay the loan”
The hardship exception requires a court application — it is not automatic. The judge considers:
- Whether you made any payments on the loan
- Whether you attempted to pay but were genuinely unable to
- Your current and future financial situation
Consumer Proposal — An Alternative to Bankruptcy
A consumer proposal allows you to negotiate a settlement with creditors (typically 25–70 cents on the dollar) through a Licensed Insolvency Trustee, without formal bankruptcy. Student loans may be included in a consumer proposal, but the same rules apply — if you’re within 7 years of leaving school, student loan creditors can vote against the proposal.
However, even if student loans are not fully released through the proposal, other debts (credit cards, lines of credit, personal loans) are — reducing your overall debt burden and freeing up income to repay student loans.
What Most People Don’t Know
- Part-time students start the 7-year clock only when they fully stop studying. If you took one course per semester while working for several years, the clock doesn’t start until you stop taking any courses.
- Private student loans are treated as ordinary debt. The 7-year rule only applies to government-issued Canada Student Loans and provincial student loans. Private student loans (from banks, credit unions) are ordinary unsecured debt fully dischargeable in bankruptcy immediately.
- The 7-year threshold has been reduced over time. It was previously 10 years. The current 7-year rule is more debtor-friendly than historical rules, and advocacy groups continue to push for further reduction.
- A trustee can advise on timing. If you’re considering bankruptcy and are 6.5 years post-graduation, waiting 6 more months may allow student loans to be fully discharged. A Licensed Insolvency Trustee (LIT) can advise on timing and the comparative benefits of waiting.
Frequently Asked Questions
I graduated 4 years ago and have $60,000 in student loans. Can I include them in bankruptcy?
Not yet — the 7-year clock hasn’t elapsed. Student loans cannot be discharged until 7 years post-graduation (or 5 years if the hardship exception applies). You could still file for bankruptcy to discharge other debts, but student loans would survive and still be owing after discharge.
I graduated 6 years ago. Am I close enough to use the hardship exception?
The hardship exception requires at least 5 years from ceasing to be a student. At 6 years, you qualify to apply for the hardship exception, though court approval is not guaranteed. Consult a Licensed Insolvency Trustee to assess whether you meet the “good faith” and “ongoing financial difficulty” tests.
What if the Crown (government) objects to my discharge of student loans?
The Crown (represented by ESDC/federal government) can appear at your discharge hearing if student loans are at issue. They may oppose an absolute discharge and request conditions (e.g., continued payments for a period). Courts balance the public interest in loan repayment against the debtor’s genuine hardship.
Does the type of bankruptcy (Chapter 7 equivalent / assignment) affect student loan discharge?
Canada has only one type of personal bankruptcy (assignment under the BIA); there is no Chapter 7/13 distinction. The student loan discharge rules are the same regardless of the bankruptcy structure.