Canada Student Loan Bankruptcy Legislation

Student loans provided through government sponsored programs are not dischargeable in a personal bankruptcy until 10 years have passed. If you file personal bankruptcy prior to the expiration of the 10 year period, it is still possible to apply to the bankruptcy court to have your student loans discharged after the 10 year period.

The key sections of the Bankruptcy and Insolvency Act are 178(1)(g) and 178(1.1) which state:

178. (1) An order of discharge does not release the bankrupt from:
(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 ten years after the date on which the bankrupt ceased to be a full- or part-time student;

178. (1.1) At any time after ten years after a bankrupt who has a debt referred to in paragraph (1)(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that
(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the loan; and
(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the liabilities under the loan.

By virtue of section 178(1.1), the Act has provided the courts with the right to discharge student loans once 10 years have past for a prior discharged bankrupt. The issue becomes what is needed to be demonstrated to the court that the student loans can be discharged.

As outlined in part (a) & (b), there are tests established. In relative terms, the test for good faith under (a) tends to be one that can be demonstrated to the courts satisfaction. The difficult part of obtaining the order is the part that deals with “…and will continue to experience financial difficulty…”. There currently are no rules to what the court is to follow with respect to length of time and definition someone’s inability to pay. To make it even more confusing is that prior court cases have varied depending on City and Province.

The fact is that several people across Canada have been able to obtain a section 178(1.1) order to discharge their student loans. Therefore, we would suggest you speak to a Trustee or lawyer about your situation and options.

As we all sit and wait for the proposed changes to the student loans and bankruptcy laws to change in Canada (sorry, as of today, no word yet on when those changes will happen; our best guess now is late in 2007, but that is just a guess, since the government has not yet begun to hold hearings on the issue), a number of former students are looking for other ways to deal with their student loan obligations.

Personal bankruptcy is only an option if it has been more than ten years since you left school. A consumer proposal is also an option, but again, if the loan is less than 10 years old it is difficult to get the creditors to accept a deal.

Another option is credit counselling, where a non profit credit counselor contacts student loans on your behalf, and works out repayment arrangements.

This is a good option where you have the ability to repay the loans, but you need an extended payment plan. There have been cases where credit counsellors in Canada have negotiated repayment terms as long as nine years.

While I would not typically recommend that anyone enter a nine year loan agreement (unless it’s a house mortgage), for a select few this may be a viable option. A list of not for profit credit counselors can be found at Credit Counselling in Canada.

Tagged as student loan, credit counselling, consumer proposal, personal bankruptcy, bankruptcy