Will filing for personal bankruptcy discharge student loans?

Student loans made under a federal or provincial student loan program will not be discharged, unless at the date you filed bankruptcy, you last attended school more than 7 years ago.

However, if you last attended school more than 5 years ago, you may apply to the bankruptcy court for an order discharging your student loan obligations if you can satisfy the court that:

  • You have acted in good faith in connection with our student loans, i.e., you’ve made an honest attempt to repay your student loans to the best of your ability; and
  • You have and will continue to experience financial difficulty to such an extent that you will be unable to pay the debt.

Now, what if you borrowed money privately from a bank, outside of a government program? For   example, some banks will offer a “student line of credit” which is a product marketed towards college or university students. Will such a debt be extinguished once you receive your discharge from bankruptcy?

The general answer is “yes”. Such a “student loan” is a private loan and would be treated no differently than credit card debt or any other bank loan.

A major exception to this rule of thumb is debt incurred to finance professional studies such as law school or medical school. For example, if a medical student borrows money privately from a bank, current case law states that she will be required to repay all of the loan proceeds to the bank via her trustee. The reasoning behind this decision by the bankruptcy courts is that the loan money was used to finance the student’s medical studies. The knowledge she acquired in medical school is an “asset” – she will earn substantial income in the future once she graduates from medical school and obtains her license. Therefore, the trustee is required to “realize” on this asset by requiring the debtor repay the debt.

How long will my bankruptcy remain on my credit report? »