Canada Student Loan Bankruptcy Legislation

As a licensed trustee in bankruptcy in Ontario, Canada I meet with many people each month who are having difficulty repaying their student loans, and they are considering personal bankruptcy. I advise them that if they can’t make arrangements to pay their student loans, the federal portion of their student loans has the ability to seize all or a portion of their tax refund to apply against the outstanding loan balance.

Today I met with a person who told me the following about their student loans. (I have omitted some details for confidentiality reasons). I will call this person Bob, which is not their real name.

Bob’s student loans are six years old, so a bankruptcy under the current rules will not discharge his student loans. In 2003 Bob’s taxable income was zero. He would have been entitled to a $1,200 tax refund that year, but Canada Revenue Agency applied $600 of the refund against his student loans, so Bob received a refund of $600.

In 2004 he was entitled to a $1,800 refund; his taxable income was $8,000, and $1,200 was forwarded to student loans. Bob was told by the student loans people that $1,200 represented the interest owing on the loans, so the balance of $600 was given to him.

On his 2005 taxes that he filed in February, with a taxable income of $11,000, he was entitled to a $4,000 refund; the entire refund was seized on account of the federal portion of his student loans.

What I found most interesting was that in 2003 and 2004 student loans did not take all of his refund, but in 2005, when his taxable income was only slightly higher than his taxable income in 2004, student loans took his entire refund.

Obviously something has changed between 2004 and 2005. There may be issues with Bob’s situation that I am not aware of, but Bob had an interesting theory.

He believes that because the federal student loans people realize that if Bill C-55 becomes law this year many former students will declare personal bankruptcy to discharge their student loans, they are now collecting all they can from former students with student loans six years old and older, since these are the loans most likely to be discharged in a bankruptcy.

I have no idea if this is true; I am only repeating anecdotal evidence. If anyone else has experienced something similar, please post a comment to this blog entry.

If you have student loans that are overwhelming, I always suggest that you contact a trustee to see if personal bankruptcy or a consumer proposal is a possible solution to your situation.

Until Bill C-55 becomes law, it may be necessary to explore other bankruptcy alternatives, including debt consolidation or negotiating with student loans yourself to deal with student loan problems.

We have a short update on when the new rules will become law: we have no idea.

As mentioned in our previous student loan bankruptcy blog entry, the Senate passed Bill C-55 with no debate just before Parliament was dissolved on the understanding that the new rules would not come into force before June 30, 2006 to give the Senate Committee on Banking, Trade & Commerce an opportunity to review the legislation, and make whatever changes are required. In a somewhat ironic twist, this commitment was made in a letter from then Liberal Industry Minister David Emerson, who has since crossed the floor to become a minister in the new Conservative government.

What does this all mean? According to Parliament’s web site, the Throne Speech opening the new session of Parliament will be read on April 4, 2006. It will presumably take a period of time thereafter for the Senate Committee on Banking, Trade & Commerce to convene hearings and call witnesses, so it is unlikely and hearings will occur before early May, 2006.

If hearings last for two weeks, and the Committee takes a further two weeks to make it’s recommendations, the Committee’s report may be available by early June, assuming Parliament has not already risen for the summer break.

Government officials at Industry Canada, the division of the government responsible for putting the legislation into the written rules followed by trustees, will no doubt want a few months to draft the rules, seek input from stakeholders, and then give all stakeholders a few months notice before .

Again, what does this mean? In my opinion (and this is purely a guess), the only way the new rules will come into force on July 1 will be if the Senate forgoes hearings, and the rules pass as noted in Bill C-55. If the Senate does hold hearings, it is conceivable that the new rules will not come into force before January 1, 2007.

If you are overwhelmed by your student loan debt, contact a licensed trustee to fully explore your options, and your bankruptcy alternatives.