Canada Student Loan Bankruptcy Legislation

In a turn of events that is both amazing and disturbing, both the House of Commons and the Senate ignored the normal committee review process and approved Bill C-55. All parties realize that an election will be called on November 28, and so to prevent Bill C-55 from dying, they skipped the normal review process and passed the Bill.

The Senate passed Bill C-55 on November 25, 2005, and it is expected to come into force in June, 2006 (exact date not yet known).

The good news for debtors with student loans is that student loans will now be automatically discharged in a bankruptcy after you have ceased to be a student for seven years, instead of the current ten year rule.

In addition, the bankrupt may apply to the court if their student loans are more than five years old, and the court may discharge the debt if the bankrupt has acted in good faith, and the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.

Stay tuned to this space for more details on how this will work in practice.

The bad news, of course, is that the government did not just go with a five year rule (or less) that virtually all experts had suggested. If proper committee hearings had been held, it is possible that a rule more favourable to students would have been adopted.

These changes do not mean you should go bankrupt; for many a consumer proposal will now be a more likely option, since under the old rules student loans did not have any incentive to accept a proposal if bankruptcy was not an option.

If you have a student loan that will be seven years old or more by June, 2006, or even five years old, you may want to contact a licensed trustee now to begin to review your options.