Canada Student Loan Bankruptcy Legislation

Section 178 1(g) of the Bankruptcy & Insolvency Act states that the following debts are NOT discharged when you declare bankruptcy in Canada:

(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student.

In summary, government guaranteed student loans are only automatically discharged if you have “ceased to be a student” for more than seven years prior to when you declare bankruptcy.

What does “ceased to be a student” mean?  In general, it means that once you leave school, you have ceased to be a student.  For example, if you got a student loan in September 2000, and graduated in May, 2004, you ceased to be a student at the end of May, 2004.  You would probably want to avoid filing bankruptcy prior to June, 2011 (seven years after you ceased to be a student).  They key here is that it is not when you got the loan, but when you ceased to be a student that matters.

Let’s continue the example by assuming that you went back to schoold for a year, from September 2007 to April 2008.  You therefore were a student, again, until April 2008, so you ceased to be a student in April, 2008.  In that example your student loan would not be automatically discharged in a bankruptcy prior to May 2015.

A strict reading of the legislation indicates that it is ceasing to be a student that is the critical date.

However, to complicate this discussion, there was a court case in 2005 that addressed this issue (Re Ledoux, 2005 SKQB 75, 8 C.B.R. (5th) 225).  In this case the bankrupt left school in 1989 (her education was funded in part by Canada student loans).  She then returned to school between 1992 and 2000, but did not receive any student loans to return to school.  She then went bankrupt in 2004.

The Bankruptcy Registrar (the judge) in this case decided that, for the purposes of the student loans, she ceased to be a student in 1989.  That was the last year she was a student for which she received student loans.  So, in her case, her student loans were discharged in the bankruptcy.

This case indicates that once you cease to be a student funded by government guaranteed student loans, the seven year period begins.  If you return to school but don’t get any further student loans, the seven year period does not restart.

Obviously this is good news for any former students who return to school, and pay for it without government student loans.

A word of caution: This case is a case from Saskatchewan.  Decisions of the Saskatchewan court are not necessarily binding in any other province.  The courts will typically consider decisions of other courts, but they are not necessarily bound by them.

To conclude, if you were a student, and then returned to school, you should speak to a licensed bankruptcy trustee in your province to get advice on how to determine the exact end of study date before you make a decision to file bankruptcy.

As readers of this blog know, the bankruptcy in Canada and student loan rules changed in July, 2008.  Under the new rules, a student loan is automatically discharged in a bankruptcy, or a consumer proposal, if you “ceased to be a student” for more than seven years prior to filing (the old rule was a ten year rule).

Recently two of the largest lenders have become more aggressive in their collection efforts.

In the first case, a number of former bankrupts got letters from a major bank regarding their student loans.  In the typical scenario, the former student went bankrupt; at the time of their bankruptcy their student loans were more than 10 years old (or seven years old under the new rules), so they assumed their student loans were automatically discharged.  After their bankruptcy finished, and they were discharged, they received a letter from the bank stating that they required a court order specifically discharging their student loans.  If the person didn’t provide a court order within 30 days, the lender threatened to turn their account over to a collection agency.

So, even though the loan was discharged in the bankruptcy, and even though the lender didn’t object to the discharge, the lender was going to bully the former student into paying their loans.

It disgusts me that a major chartered bank in Canada would do this, but I guess even large institutions can be bullies.  When we first heard of this (it happened to a number of my firm’s former bankrupts), we immediately contacted a lawyer, who sent a letter to the bank.  A few days later the bank backed down, and apologized, saying it was a mistake, and they promised to send letters of apology to the debtors impacted.

Here’s my question: how many people fell for this?  How many people started making payment arrangements?  How many people didn’t deal with a trustee that was able to contact a lawyer and sort this out?  I’m glad this problem appears to be solved, but it is a worry for the future.  They backed down now; will they try it again in the future?

I had another former bankrupt contact me to advise that the bank was pursuing her for a very old student loan.  Her proposal was completed six years ago, and at that time her student loan was not ten years old (as the rule was at the time), so it wasn’t automatically discharged.  It surprises me that it would take student loans six years to decide to pursue someone.

In the final case this past week, a debtor filed a consumer proposal, and he knew that because his student loan was only three years old, it would not be automatically discharged.  Within a few days of filing he got a letter from the lender advising that they would be happy to continue to accept payments from him.  Since the loan is not dischargeable he can continue to make payments.  Of course he is not legally required to resume payments until his proposal is finished; the letter he received didn’t explain his options in full.

So, even though you filed for bankruptcy and assume your student loans are discharged, the process may not be finished.  It’s important to choose a reputable trustee to help you through the process, so that they are there to help even after the process is finished.

Under the new 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 an 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”.

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.

Over the last two weeks I have had a higher than usual number of people coming into my office who finished their consumer proposal in 2008, and now they are getting phone calls from collection agents for their student loans.

Under the old rules, if their student loan was less than 10 years old at the time they filed their consumer proposal (7 years under the new rules), the student loan was not automatically discharged in the consumer proposal (or bankruptcy). The lenders don’t go after you while the proposal is running (they can’t), but as soon as it’s finished, they resume their collection activities.

These people had other debts, and since a bankruptcy would not have discharged their student loans, a consumer proposal made sense at the time; it allowed them to deal with their other debts, and “buy time”. If their job situation has improved, they may now be able to deal with their student loans.

Here was my advice to these people:

Start by asking the collection agent to send you written proof of what you owe. Explain to them that you had filed a consumer proposal and thought that you had cleared your debts. You want something in writing proving what you owe. Once you have this, your first option is to try to make a deal with the collection agency. If there is any way that you can raise some cash, then offer to pay a lump sum of what you can afford. For example, if you owe $5,000 and can borrow $2,500 from family and friends, then offer that as a settlement. A settlement often works, because many collection agents work on commission, and often they would rather get their pay from a lump sum now than have to wait by collecting small amounts monthly.

Your other option is to file for personal bankruptcy. If more than seven years has now passed since you ceased to be a student, your student loans will be automatically discharged when you file bankruptcy.

Of course bankruptcy is the last resort, so before you decide to go bankrupt you will want to discuss your situation with a trustee; a list of trustees that offer no-charge initial consultations can be found on the bankruptcy Canada web site.

In an absolutely stunning and unprecedented development, on July 7, 2008 the Minister of Labour signed an Order in Council changing the automatic discharge period for student loans in a bankruptcy from ten years to seven years.

This is a stunning turn of events, since the Office of the Superintendent of Bankruptcy is still working on drafting the regulations to the new rules. In other words, we don’t know how the new rules will work, but they are here!

Even more amazing is that in most cases when new laws are passed, all of the law is brought into force at the same time. Not today. Only two sections of the law were changed. First, the new RRSP bankruptcy rule, which allows a bankrupt person to keep their RRSP if they go bankrupt, except for contributions made in the preceding year. And, of course, the new student loan rule.

That’s it. All of the other new bankruptcy rules are still in limbo.

What does this mean to you?

If you are in financial trouble and are considering bankruptcy, and if you have been out of school for over seven years, you should immediately contact a licensed bankruptcy trustee to arrange a free initial consultation to determine if bankruptcy truly is the solution for you. There are other options, which is why a consultation is necessary.

We are awaiting publications of the exact rules; as they become available, I will post information on this blog.

As you are all aware, on December 14, 2007 the new bankruptcy rules, including the new student loan bankruptcy rules in Canada, received Royal Assent, but as of today they have not yet come into force, and the coming into force date has not yet been announced.

I have no idea when the new student loan bankruptcy rules will come into force, but I am happy to provide my best guess. Please note: this is just a guess on my part; the government has not yet announced the implementation date. When they do, I will post it here. To be notified immediately, please complete send in your e-mail address on the form to the right of this page. I promise I will not sell or use your name or e-mail address for any purposes other than to notify you of changes to the legislation.

So, here’s my fearless prediction:

The new student loan bankruptcy rules will come into force on November 1, 2008.

Why did I pick November 1? Here are my reasons:

First, The Senate Standing Committee on Banking, Trade and Commerce has completed it’s hearings on the new legislation. The last hearing was held on April 3, 2008, and no further meetings are scheduled. Since Parliament rises for the summer shortly, it is unlikely that the Senate will hold further hearings, so there are no Parliamentary reasons for the implementation of the legislation to be delayed.

Second, November would be a good time of year to have the new rules implemented. It gives the government the summer and early fall to get ready, and avoids a later implementation in December or January over the holiday season.

Third, a new Superintendent of Bankruptcy, Mr. James Callon, was appointed effective March 12, 2008. A November implementation deadline will give Mr. Callon sufficient time to become familiar with his new role, and to assist with the implementation of the new rules.

Fourth, historically, it is very unusual for legislation to come into force more than one year after it is given Royal Assent. Government officials require time to implement the new regulations, but it would be very unusual for the government to require more than one year to implement the changes.

Fifth, I have received confirmation that the Office of the Superintendent of Bankruptcy (“OSB”) and the Department of Justice Canada have drafted the regulations and forms that will accompany the new Wage Earner Protection Program, as well as the amended provisions of the Bankruptcy and Insolvency Act (“BIA”) and the Companies’ Creditors Arrangement Act (“CCAA”). OSB officials are currently amending and drafting the directives what will accompany the same legislation. The Directives are often the most important part of the implementation plan, because it’s the Directives that contain specific guidance on how the new rules will be implemented.

Finally, it is likely that the new Wage Earner Protection Program will be implemented before the changes to the remaining legislation are implemented. The WEPP protects workers if the company they work for goes bankrupt, so even though the WEPP will impact on far fewer people than will changes to the BIA, it is politically expedient for the government to implement the WEPP changes first, so that they can take credit for helping workers in the event that an election is called in the near future. As a guess, it is possible that the WEPP will come into force around September 1, with the remaining changes implemented in November.

Again, let me emphasize that there has been no official announcement from the government indicating when the new rules will come into force. As stated above, I am merely guessing at a November 1, 2008 implementation date. The date could be earlier, or later.

What does this mean to you?

If you, or someone you know, is experiencing financial difficulty, you should consult with a licensed trustee in bankruptcy to assess your options. If your student loan debt is manageble, they may suggest credit counselling or a debt consolidation loan. They may suggest that you file a personal bankruptcy or a consumer proposal before the new rules come into force, or in your situation waiting may be the correct answer. Either way, contact a Canadian bankruptcy trustee, licensed by the federal government and offering free initial consultations, for a review of your situation. I’ll post more when more information is available.

We still don’t know when the new rules will come into force, and the Senate continues to hold hearings on the new rules. As reader’s of this blog are aware, Ted Michalos and I, Douglas Hoyes, appeared before the Committee on February 7, 2008, and I posted my comments on our Senate Testimony on Student Loans and Bankruptcy shortly thereafter. You can view our complete testimony as it related to student loans on You Tube, and you can see it here as well:
Student Loans Testimony Part 1:

Student Loans Testimony Part 2:

Student Loans Testimony Part 3

Student Loans Testimony Part 4

The written transcripts of our testimony are also available, in English and French, on the Senate Banking Committee Web Site.

During my testimony I made the case that former students with student loans that go bankrupt have lower incomes than other Canadians, and that’s one of the main reasons they need to go bankrupt in Canada. Following our testimony, on March 13, 2008, Rosaline Frith, Director General, Canada Student Loans Program, appeared before the Committee to make the case that the plight of students was not nearly as dire as I, and other witnesses, had made it out to be. She received quite a grilling by the Senators, and many questions were left unanswered.

As a result of these unanswered questions she was called back to testify again on April 3, 2008. I am only aware of one newspaper that covered the hearings; you can read their story in New Brunswick’s The Daily Gleaner.

I have read the unofficial transcripts of the hearing. Once they are finalized they will be posted on-line on the Senate Web Site, which usually takes about two weeks. While we await the official transcripts, here are some quotes from the unofficial transcripts:

Ms. Frith: “We have also compiled information on the percentage of students in default and collection. Student loan default rates are calculated on borrowers during the first three years following consolidation of their student loan debt. One-hundred and fifty-three thousand Canada Student Loan borrowers consolidated their Canada Student Loans in the 2003-04 loan year for an approximate worth of $1.63 billion. That year, 43,600 borrowers defaulted and were transferred to the revenue agency for collections, for a total principal value of $330,928,063. The default rate for this cohort was 28 per cent. Those were the people in 2003-04.” (emphasis added)

Translation: The government admits that 28% of the borrowers from the 2003-2004 school year are in default on their student loans! That’s a huge default rate for any lender.

Then the next surprise: Currently, an outside collection agency is used to collect student loans. The government has reviewed this approach, and also testifying at the hearing, Tony Manconi, Director General, Non-Tax Collections, Canada Revenue Agency, had this to say:

“As a result of the review, the government made a decision that the CRA will be discontinuing its use of private collection agencies for the collection of default of Canada Student Loans and it will assume full responsibility of this function.”

Translation: Even though there were no problems with the program, we are going to completely change the way we collect from former students.

But wait, it gets better. In her opening statement, Ms. Frith said that the government is introducing new measures to help students, and:

“The new measures will make payments affordable, and no student borrower would be forced into bankruptcy as a result of their student loan.”

There you have it: the government has now committed that in the future no student borrower will be forced into bankrupt because of their student loans! Hooray! I can stop writing this blog, because all problems have now been solved! But that begs the question, asked quite eloquently by Senator Ringuette:

“You say in your statement: The new measure will make payment affordable and no student borrower will be forced into bankruptcy as a result of their student loans. How will you achieve that?” Good question. Here is Ms. Frith’s response:

Ms. Frith: Any student who graduates within the first six months after graduation and is unable to acquire employment or has employment at a very low income, depending on the size of their family and where they are living, they would be able to apply for repayment assistance, as is the case today. However, in the future, as a result of the budget, we would do a calculation when they would apply for repayment assistance. They would be required only to make a payment which is affordable.

Therefore, if they are below a certain income level, depending, again, on the size of the family, they might not have to make any payment at all. The government would assume the cost of the interest and the principal for a period of time. Then, every six months, we would look again at their salary levels and discussing it with them. We would conclude what would be an affordable payment.

Under the new plan, they will not have to make any payment at all, if they cannot afford to make any payment according to the criteria. The government will continue to assume the full burden of their loan, up to a limited period. This is not something that would go on forever. There would come a point where the loan would have been completely paid down and they would no longer have any obligation.

In respect to their student loan, there should never be any stress on the person that would be forcing them into bankruptcy because of someone harassing them for collection or anything else with respect to their student loan.

Senator Ringuette: As you have said and as has been discussed before at this committee, collection harassment is twofold: One was from your portion of the student loan administration and the other one was from Revenue Canada. You are only able to talk about your portion of the student loan collection.

Ms. Frith: This is true. However, my assumption would be that a student informed about what is available to him or her would not go to collections. He or she would apply for repayment assistance and would stay in repayment assistance for as long as is necessary. A student would never default. He or she would never be forced into a default situation.

I cannot imagine who would actually default. You would be defaulting to make a point. You would be doing it because you decided you did not want to apply for repayment assistance. The program that is being put in place is such that no one would be ever put in a situation where they should be defaulting on their loan.

There, my dear readers, is the perspective of the government officials running the student loans program. Despite the fact that they have maintained everything is fine and no changes are required to the current rules, they admit that 28 percent of students from 2003 are in default, and the program is so bad they are now going to move collection activity in house, and they are bringing in new measures to help students! The new measures, announced in the 2008 federal budget, amount to $74 million over four years to make the Canada Student Loans Program “more responsive to the economic circumstances of borrowers by providing greater assistance to those experiencing difficulty in repaying their loans. The new measures will make payments affordable, and no student borrower would be forced into bankruptcy as a result of their student loan. More details on the improved measures will become available over the coming months.”

Translation: $331 million of student loans are in default just for the 2003-2004 year, but $18.5 million per year in new funding, and some new procedures, will fix all of those problems, and the result will be that “a student would never default“. (Of course we have no idea what this really means; fortunately “more details…will become available over the coming months.”

This all sounds great, but I think we are missing two key points here.

First, Canada student loans represent about 60% of outstanding student loan debt. The other 40% is funded by provincial student loan programs. If the federal government is correct and these “new measures” do solve all problems, they are only solving 60% of the problems; unless the provinces also reform their procedures, which to date they have not done, we still have a huge problem.

Second, the officials at the Canada Student Loans Program seem to believe that everyone graduates, and then just decides not to repay their loans. In fact, when asked to comment on the profile of the average student loan debtor, Ms. Frith said that some of the defaulters are “what I would call early defaulters, who are young and male, and who have incurred probably all kinds of other debt, such as for cars. They sometimes choose not to make payments.” They have probably incurred all kinds of other debt, such as for cars. Why the word “probably”? I assume it’s because that’s an opinion, not based on hard facts. It seems unfair to characterize debtors who aren’t paying as young males who spent all of their money on cars.

I disagree. My firm has handled well over 10,000 personal bankruptcies and consumer proposals over the last ten years, and if I may draw on my experience from the few thousand people I have personally met with, fancy cars is not the main reason people don’t repay their student loans.

The main reason is that we get student loans when we are young. We go to school hoping to get a job in high tech, just before the high tech bubble bursts. Or, even worse, we don’t actually graduate. I have personally met with dozens of people who went to a private vocational school and before they could graduate the school went out of business. It happens fairly frequently. Unfortunately for those students, they must still repay their student loan, even though they didn’t get the benefit of their education.

In fact, in our written submission to the Committee, we demonstrated that “Jane Student”, the average student loan debtor who goes bankrupt, is actually more likely to be female and earning a low income, certainly not a male with a car payment.

I fully agree that if you graduated as a doctor and you are earning $200,000 per year, you should pay back your student loans. I’m a taxpayer, and I don’t want my taxes to increase because student loans are not being repaid. However, if you couldn’t graduate, or if you have been unable to secure employment where you can earn enough to repay your student loan, you should be given a break.

That’s why I went to Ottawa to argue for more compassionate treatment of former students, and that’s why I maintain this blog.

That’s my rant for today. In the future I’ll try to stick just to the facts of the situation.

If you want to be kept up to date on the latest changes to the student loan rules, please go to the top right hand corner of this page and subscribe to our newsletter. I will not sell or rent out your name; I will send out e-mail alerts whenever we know more about what’s happening with the new rules. If your student loans are already ten years old or close to it, or if you have other debts as well and you want to determine whether a consumer proposal or a bankruptcy is the correct option for you, follow this link for a list of bankruptcy trustees and proposal administrators across Canada that provide free initial consultations.

As of today there is still no word on when the new rules regarding student loans and bankruptcy in Canada will come into force. The Senate continues to hold hearings on the proposed new rules. It is possible that the Wage Earner Protection provisions will be implemented before the rest of the rules, but that is pure speculation at this point. I can only guess that the rules will be proclaimed into force later this year, but that is just a guess.

So how will you know when the rules do come into force? We have added a form in the top right hand corner of this page. You can submit your name, e-mail address and phone number, and we will notify you as more information becomes available. Don’t worry, I promise not to sell, rent, or disclose your contact information; all you will receive is an e-mail alert as changes happen.

In other news, the fight continues for more fair rules for former students. I’ve been fighting for many years already. (Check out the Office of the Superintendent of Bankruptcy’s web site; in footnote #34 they quote my student loan comments from 2005). In my last blog post about the new rules I discussed my testimony before the Senate Committee on February 7, 2008. You can now view my opening remarks on You Tube:

Other people are fighting as well. On February 27, 2008, Bob Klotz, one of the top insolvency lawyers in Canada, also appeared before the Committee. You can read his full testimony on the Klotz Associates web site.

In his testimony Mr. Klotz agreed with my approach. He said that, referring to the period for discharge of student loans, “we prefer that it be as short as possible.” He then went on to make what I believe was the most insightful comment I have heard on the subject (I wished I had said it myself). He said that reducing the period to two years would be largely meaningless, because with interest relief periods most students would not be going bankrupt that quickly anyway. However:

“We think that if this period was brought down to two years ….it will serve the function as acting as a guide to the courts.”

Bingo. Mr. Klotz is of the opinion, and I agree, that because this rule exists, the courts naturally assume that former students should be treated harshly. This “harshness” effect is caused by the existence of the provision (s. 178(1)(g)), rather than the exact number of years it specifies, and therefore it’s okay to reduce the period. By reducing the period to two years, the courts will be more understanding of the position of former students in financial difficulty, and will hopefully therefore be more amenable to allowing student loans to be discharged without conditions when discharge hearings are required.

Information on Mr. Klotz can be found on the Klotz Associates web site. Information on bankruptcy and student loans, and how to find a bankruptcy trustee in Canada. For e-mailed updates, complete the form at the top of this page, and thanks for reading.

As I reported last month, on December 14, 2007 the new bankruptcy rules received Royal Assent. However, as of today, they have not yet come into force.

That means that the old rules are still in effect: Student loans are only automatically discharged in a bankruptcy if you have ceased to be a student for 10 years or more at the time you go bankrupt.

When will the new rules come into force? As of today, we don’t know. As soon as we do know, I will post it here.

Also, on February 7, 2008 Ted Michalos and I will be testifying before the Senate Standing Committee on Banking, Trade and Commerce. I will be arguing for a reduction in the student loan rule from 10 years currently to 2 years (the new legislation proposes 7 years). The chances of any further changes happening at this time are slim, but I’ll give it a shot.

You can watch the testimony live on the internet at noon eastern time on February 7 on the Senate web site. I’ll report back as to how it went.