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Declaring bankruptcy to wipe out student loans

Expert: Linda Stern

Gene asked:

My student loan has been hanging over me for over ten years now, and bankruptcy laws have changed quite a bit since then I hear. If I received student assistance from 1990-1993, can I still legally go bankrupt. What do I need to go bankrupt? Does it cost me?

Linda Stern answered:

You will be unable to discharge a student loan if you have graduated from school or stopped school within the past ten years. This person is saying that they have received assistance from 90 to 93. So let's say in 93 you ended up getting the last installment on your OSAP, but you only finished school in 2004, or the end of 2003. You will have to wait until 10 years passes from your end of study period to enable this student loan to be wiped out from bankruptcy. The best advice is for you to get a confirmation from your school as to when your end of study was.

Can you still legally go bankrupt? Yes, you can go bankrupt, although if that's your only debt and it's within 10 years it doesn't make any sense. But if you're juggling the student loan along with $25,000 in credit card debts it may be worthwhile. Although if it's a matter of waiting another six or eight months it may make sense to do everything together.

The cost of the bankruptcy is a function of your monthly net income less any non-discretionary expenses. Such as childcare, child support, spousal support, medical condition expenses, business expenses. This does not mean driving your car to work every day but expenses that come out of your own pocket that you would deduct, similar to what you would do on your tax return. Fines and penalties are also included.

Then we have to look at the Superintendent of Bankruptcy Standards on determining surplus income. If you're single with zero of these non-discretionary expenses the Superintendent of Bankruptcy has set a standard of $1,643. For example, if you're netting $2400 a month as a single person that leaves us with $757 in surplus. From there you would cut it in half to $378.50 which is the amount that you would have to pay to the trustee for a minimum of nine months. A first time individual doing a bankruptcy would be entitled to an automatic discharge in nine months, and you have to make that amount for nine months unless the creditors felt that you should be paying more and that's a separate issue. This is if there is surplus income. If you don't have surplus income and you're clearing $1600 a month then the cost of the bankruptcy could be anywhere from $1360 to $1650.

If you have, presumably, any income tax refunds that you've been entitled to, you're probably losing them because they are being offset against the student loans. The way that school loans worked was that there was a bank risk portion back then, so you could have a small amount owing to a bank and then a larger amount that's government guaranteed by Canada and Ontario. If there's a government part of your loan, chances are that you've been losing your refunds. In a bankruptcy you would lose the income tax refund from the year prior and have it applied to the loan. In the year of bankruptcy from the time that you declare bankruptcy to December 31 of that year, we call that the post-bankruptcy tax return period. If you have assets such as an RRSP, which is in a non-segregated fund, in other words if it were with the bank or a broker if it's not with a segregated fund you would lose that RRSP.

In a bankruptcy you would have to two mandatory counseling sessions, one on budgeting and one on rebuilding credit. Your credit would be an R9 for the period of bankruptcy plus six years. So the averages for an R9 are about seven years. When you get your discharge from bankruptcy you would rebuild your credit. One of the ways of rebuilding credit is trying to get a secure credit card where you have a limit and that amount is secured by a bank account or GIC. In nine years, in effect, no one is supposed to see that you did a bankruptcy. Generally there is no cost for an initial consultation.

About the author

Linda Stern is a Vice President and Bankruptcy Trustee with Mintz and Partners Limited.

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