Financial Crossroads: Considering Bankruptcy for Student Loans in Canada

Woman with a Canadian flag wrapped around her while standing in front of lake

Everybody deserves an education, but unfortunately, education often comes at a great cost. Student loans in Canada can get overwhelming, especially for people who are just starting their careers. A report conducted in 2022 showed that 1.9 million Canadians owed a combined total of $23.5 billion in student loans to the federal government.

With such staggering numbers, it’s easy to see why some people consider declaring bankruptcy. While the prospect of being debt-free is tantalizing, bankruptcy is a serious decision that can affect their future finances.  You need to know exactly what you’re getting into and what you’re getting out of it. 

Does declaring bankruptcy forgive student loans?

Yes, it does. Declaring bankruptcy guarantees that any student loans are forgiven, although with some caveats. Bankruptcy only forgives student loan debts if the person declaring hasn’t been a student of any school for at least seven years. In rare cases, the grace period is five years, for people who can prove they are in particularly dire financial circumstances.

Demonstrating the latter is challenging for many people, as the government is very strict about who gets their debts forgiven. This is why bankruptcy is an impossible solution for fresh graduates, as they are far from the end of the grace period. Young adults need to contemplate their financial strategies before applying for bankruptcy.


Bankruptcy might help clear a person’s overwhelming debts. It can wipe away certain loans, giving them a chance to start fresh. For those struggling with money, this could take off a huge weight and let them focus on rebuilding. The biggest draw for bankruptcy is that the forgiveness is guaranteed. Regardless of circumstance, bankruptcy ensures you will no longer have student loan debt by the end of the process.


However, not all loans can be erased by declaring bankruptcy. Government loans, especially, are hard to get rid of this way. Also, declaring bankruptcy sticks on a person’s credit report for a long time. Bankruptcy is a black mark on your record that tells banks you are incapable of paying off promised debts. This can make it tough to get loans or credit cards in the future and mess up their financial reputation. 

Is bankruptcy the right thing to do?

Deciding on bankruptcy is a big deal. While debt forgiveness is guaranteed, so is the fact that a person is now bankrupt. This limits a lot of future prospects, as banks and businesses might be wary of handing out loans.  In every scenario, bankruptcy needs to be looked at as the final resort.  The effects are immediate, and thus, very hard to work around once it’s happened. Find a good family lawyer to help you out with your decision on the matter.

Other debt repayment options

Before declaring bankruptcy, here are some other avenues to pay off student loans in Canada:

Strict budgeting

Setting a strict budget can significantly help you on your debt repayment journey. Oftentimes, the funds might be there to pay off debt regularly, but just not being optimized for it. If the goal is to pay off debt as quickly as possible, adjust your priorities. Generally speaking, this should be the order of importance:

1. Sufficient Food and Water

2. Rent and Utilities 

3. Emergency Funds

4. Student Loans

Everything else, barring extenuating circumstances, must be reduced to compensate. Don’t be so harsh on the budget that living becomes difficult, but don’t ignore the debt with minimum payments either. Keep an eye on income and track how much it goes towards productive priorities. 

Additional payments

Once a budget is set, you start figuring out how much excess you have every month. Whenever possible, direct these excess costs towards topping up student loans. Student loan counselor Jessica Ferastoaru recommends applying those extra payments to the principal balance, not the paid ahead status.  Automating these payments through your bank is also helpful for avoiding any potential penalties. 

Take a part-time job

If you have the opportunity for part-time work, take it to help pay off the debt earlier. This is especially helpful for fresh graduates who don’t yet have the experience to obtain higher salaries. Even a 25% increase in total income can shave off a year or two from debt repayment in the long run. 

Repayment Assistance Plan (RAP)

The Government of Canada can assist you if you are having financial difficulties if you’ve applied for a Repayment Assistance Plan.  Depending on net income, student loan debt payments can be either reduced or covered by the government.  If your income falls below a certain threshold, then payments will be covered by the government for the duration of the plan. It’s required to reapply to this program every six months to continue using its benefits.

Refinancing Student Loans

This is a complicated process but it could theoretically result in lower interest rates and smaller monthly payments. A good credit score is required before applying for refinanced student loans, among other factors such as occupation and degree. It’s best to refinance while rates are down and lock it in. Make sure to have a financial advisor or lawyer on hand to help you with refinancing.

Final Thoughts

Every person’s money situation is different. Deciding on bankruptcy for student loans needs careful thought. Bankruptcy might seem like a way out of debt, but it’s not an easy fix. It’s important to think hard about the consequences. Exploring other ways to handle loans, getting advice, and understanding what bankruptcy means are all crucial steps towards financial stability.





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