Rising tuition, textbook, and housing costs have left many Canadians graduating with significant student debt. What starts as an investment in your future can quickly become overwhelming when monthly payments pile up — especially if you’re juggling other financial obligations like credit cards, car loans, or lines of credit.

If you’ve struggled to manage these payments, you may wonder if options like bankruptcy or a consumer proposal could help you find relief. Both options fall under Canada’s Bankruptcy and Insolvency Act (BIA), but each impacts your student loans differently.

This guide explains how each process works, the seven-year rule for government-backed student loans, and how you can confidently move forward after resolving your debt.

Understanding Student Loans in Canada

Before diving into debt relief options, it’s essential to understand the difference between government and private student loans.

• Government student loans — such as those from Canada Student Loans or StudentAid BC — are backed by the federal or provincial government.
• Private student loans are typically obtained from banks, credit unions, or other financial institutions. These loans may be a line of credit, personal loan, or credit card debt used for education-related expenses.

Why does this distinction matter? Only certain types of student loans can be automatically discharged through bankruptcy or a consumer proposal, depending on when you last attended school.

How Bankruptcy Affects Student Loans

When you file for bankruptcy in Canada, most unsecured debts can be eliminated — including credit cards, payday loans, or personal lines of credit, for students, that can include private education loans or credit card balances used during school.

However, government student loans are subject to a specific rule known as the seven-year rule under section 178(1) of the Bankruptcy and Insolvency Act.

The Seven-Year Rule Explained

To qualify for discharge of a government-backed student loan through bankruptcy:

• You must have been out of school for at least seven years, whether part-time or full-time.
• The seven-year period begins when you last attended classes, not when you received your last loan or graduated.

Example:

If you completed your studies in May 2019, your government student loan would only be eligible for discharge after May 2026. Filing before that date means the student loan would survive your bankruptcy.

During bankruptcy, collection activity on all debts (including student loans) stops temporarily, giving you breathing room. However, once you are discharged, any government student loan that falls within that seven-year window will become collectible again.

The Hardship Exception (Five-Year Rule)

If repaying your government student loan causes severe financial hardship, you can apply to the court to shorten the seven-year rule to five years. This process is not automatic — you must prove that:

• You acted in good faith in trying to repay your loan (e.g., made payments when possible, sought repayment assistance programs), and
• You continue to experience financial hardship that prevents you from repaying.

This “undue hardship” application must be filed through a Licensed Insolvency Trustee (LIT). While not common, it can relieve borrowers who have exhausted all other repayment options.

How a Consumer Proposal Affects Student Loans

A consumer proposal is a legally binding agreement between you and your creditors, managed by a Licensed Insolvency Trustee. It allows you to repay a portion of what you owe — often with no interest — over up to five years.

It’s an attractive alternative to bankruptcy because:

• You keep your assets (home, vehicle, RRSPs, etc.).
• You avoid bankruptcy’s longer credit impact.
• Collection calls and legal actions stop immediately once the proposal is filed.

Student Loans and the Seven-Year Rule in Consumer Proposals

Like bankruptcy, the seven-year rule applies to government student loans in a consumer proposal.

This means:

• If it has been seven years or more since you last attended school, your government student loans can be discharged at the end of your proposal.
• If it has been less than seven years, those loans will not automatically erase — but you’ll still receive protection from collection efforts during the proposal term.

In other words, while your student loan won’t disappear, the proposal can make repayment more manageable by reducing your other unsecured debts. You may continue making payments on your student loan while your proposal is active — many find this easier once credit card and personal loan payments are paused.

Private Student Loans Are Different

Private student loans (for example, from a bank or credit union) are treated like other unsecured debts. These can be included and discharged through either bankruptcy or a consumer proposal, regardless of how long you attended school.

This is especially helpful if your private education loans have collections with high interest rates.

Other Options Before Bankruptcy or a Proposal

Before considering formal insolvency options, you might explore federal repayment assistance programs such as:

• Repayment Assistance Plan (RAP): Based on your income, you may qualify for reduced or zero payments for six months.
• Revision of Terms: You can extend your repayment period to lower monthly payments.
• Interest Relief: Available for those facing temporary financial hardship.

These programs sometimes bridge the gap until you reach the seven-year mark, at which point bankruptcy or a proposal could provide full discharge of your student loan debt.

Can You Get a Student Loan After Bankruptcy or a Consumer Proposal?

Many borrowers worry that filing will prevent them from returning to school or accessing new funding. Despite some restrictions, the good news is that obtaining student loans after insolvency is still possible.

Here’s what to expect:

• Disclosure is mandatory: You must declare any previous bankruptcy or proposal when applying for a new loan.
• Government loans may have waiting periods. For example, StudentAid BC generally requires 10 years since leaving school after a bankruptcy before new funding is available — or 8 years in hardship cases.
• Private lenders evaluate credit history: You’ll need to rebuild your credit score before most banks approve new education loans or lines of credit.

Rebuilding Your Finances Afterward

Whether you file for bankruptcy or a consumer proposal, recovery and rebuilding your financial health are possible. Here’s how to start:

1. Rebuild your credit: Apply for a secured credit card or a small credit builder loan. Make on-time payments to establish a positive history.
2. Create a realistic budget: Track income and expenses to prevent relying on credit again.
3. Start saving small: Even setting aside $25–$50 monthly helps establish new financial habits.
4. Monitor your credit report: Ensure debts discharged in bankruptcy or a proposal are reported correctly.

When to Speak With a Licensed Insolvency Trustee

If your student loans — or the debts surrounding them — are causing ongoing stress, a conversation with a Licensed Insolvency Trustee (LIT) is a smart next step. A trustee can:

• Review whether the seven-year rule applies to your situation
• Help determine if you qualify for the hardship exception.
• Outline all available options (including debt consolidation or budgeting plans)
• File a proposal or bankruptcy, and guide you every step of the way.

Get Help With Student Loan Debt in B.C.

At Crowe MacKay & Company, we understand the pressure that student debt can create. For over 50 years, our team of Licensed Insolvency Trustees has helped Canadians find practical, compassionate solutions to manage and eliminate debt.

If you’re struggling to keep up with student loans or other unsecured debts, we’re here to help you evaluate every option — from repayment assistance programs to consumer proposals and bankruptcy.

Get in touch for a free, confidential consultation with one of our insolvency professionals. Together, we’ll help you regain control of your finances and build a stronger financial future.