What Constitutes Hardship with a Student Loan after Bankruptcy in Canada?

Under student loan and bankruptcy in Canada rules implemented in July, 2008, a student loan is automatically discharged if you have ceased to be a student for more than seven years when you file bankruptcy. In addition, if more than five years have elapsed between the time you ceased to be a student and you go bankrupt, you may make a harship application to bankruptcy court to have your student loans forgiven. It will be up to the bankruptcy court to decide whether or not they forgive your loans, either in full or in part. To obtain forgiveness, you must demonstrate “hardship”.

What does “hardship” mean?

There is no clear definition for what constitutes hardship; each bankruptcy court across Canada may use a slightly different definition. However, in general, hardship is a simple concept: having to continue to pay your student loans after bankruptcy would be a financial hardship for you.

For example, if you were forced to leave school early without graduating, perhaps due to a medical problem, and you are now working at a minimum wage job, the court would likely determine that you would suffer financial hardship if you were required to continue paying your student loan. The court would consider the benefit you received from your education (in this example, not much, since you were unable to graduate), and your current income (again, in this example, not much). Contrast that with the example of a person who graduates as a doctor from medical school, with $150,000 in student loans. On the surface it may appear to be a hardship for him to repay the loans, but if he is earning a doctor’s income it is unlikely that the court will allow for the loans to be discharged due to “hardship”. Obviously most examples are somewhere between these two extremes.

I suggest you contact a local bankruptcy trustee, who will be familiar with the court’s approach in your area. They will probably put you in touch with a local bankruptcy lawyer, who can make the application to court on your behalf. You can apply for relief on your own, but in most cases it is wise to have an experienced lawyer making the application on your behalf.

Published on Monday, February 16th, 2009