Canada Student Loan Bankruptcy Legislation

In my previous post I described the progress of Bill C-12, the new legislation to amend the Bankruptcy & Insolvency Act, including changes to the treatment of student loans in bankruptcy in Canada.

Under current law (section 178 (1) (g)):

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;

The rules proposed by Bill C-12 (but not yet law) will change the final clause in Subparagraph 178(1)(g)(ii) to read:

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

In other words, the new proposed rule changes the limit from ten years to seven years.

In addition Subsection 178(1.1) of the Act is replaced by the following:

(1.1) At any time after five 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 debt; 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 debt.

In other words, if you go bankrupt, after five years you may apply to the court to discharge your student loan, provided you can prove to the court you have acted in good faith, and you will continue to experience financial difficulty if the loan was not discharged.

There is one final clause that should be emphasized. Many student loan debtors do not want to file for personal bankruptcy in Canada; instead, they prefer to file a consumer proposal, which is a negotiated settlement with their creditors.

For example, if you owe $20,000 on credit cards and $10,000 on student loans that are four years old, if the credit cards all vote in favour of your consumer proposal, the proposal is accepted, since more than half of the dollar value voted in favour. Under the new rules, the student loans would NOT be bound by the proposal unless they specifically vote for the proposal, as contained in the new Subsection 62(2.1) of the Act:

(2.1) A proposal accepted by the creditors and approved by the court does not release the insolvent person from any particular debt or liability referred to in subsection 178(1) unless the proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability voted for the acceptance of the proposal.

Therefore consumer proposals may not be a great solution for student loan debts.

At this time the new rules have not yet become law, so they may change. Stay tuned to this space for updates, or contact a licensed Canadian bankruptcy trustee for a free initial consultation if you have any questions about how to deal with your student loans.

For those of you who are new to this blog, here is an update on where we are at: Currently you must have “ceased to be a student” for ten years in order for your student loans to be automatically discharged if you declare personal bankruptcy in Canada. Virtually everyone agrees that forcing former students to wait ten years before getting relief from the bankruptcy process is unfair.

On November 25, 2005 the government, realizing that an election was about to be called, encouraged the House of Commons and the Senate to pass, without debate, what was then known as Bill C-55, now known as Chapter 47 of the Statutues of Canada. You can read Chapter 47 here, or download a pdf copy of Chapter 47 here .

So what was the problem? Because Bill C-55 was passed with virtually no opportunity for corrections or changes, then Liberal Industry Minister David Emerson advised the Senate Committee on Banking, Trade & Commerce that the new rules will not come into force before June 30, 2006 to allow the Senate to review the Bill and make changes. Click here to read the letter from Industry Minister David Emerson.

Unfortunately new bankruptcy legislation is not a priority in Canada, so progress has been slow.

On December 11, 2006, The Minister of Labour, Jean-Pierre Blackburn, tabled in the House of Commons a Ways and Means motion to introduce an Act to amend the Bankruptcy and Insolvency Act, the Companies’ Creditors Arrangement Act, the Wage Earner Protection Program Act and chapter 47 of the Statutes of Canada, 2005. This Bill was known as Bill C-62. The Bill was passed at Third Reading by the House of Commons on June 14, 2007, and received First Reading in the Senate on the same day.

However, the Bill died when Parliament was prorogued on September 17, 2007, ending that Session of Parliament.

But wait! All is not lost. On October 29, 2007 the government introduced Bill C-12, an exact copy of the previous Parliamentary session’s Bill C-62, and the Bill had three readings and was passed on October 29 and referred to the Senate.

First Reading was held on October 30, 2007 in the Senate, and Second Reading happened on November 15, 2007; you can read the Senate Debate here.

The Bill has now been referred to the Senate Standing Committee on Banking, Trade and Commerce for detailed review. The first Committee Meeting is scheduled for November 29, 2007.

How long will Senate Committee hearings take? No-one knows, but it would appear that hearings will last until at least February, 2008, so it is possible that the Bill, with amendments, if any, will be referred back to the House of Commons in March, 2008. If all goes well, the Bill could be passed as early as March, 2008. It is possible that the new rules could be in place as soon as March, 2008, but it is more likely that a transitional period will be imposed, so it is more likely that implementation of the new rules could happen on July 1, 2008,or September 1, 2008, or even January 1, 2009. As you can see from the history I have presented, these are purely guesses on my part. We have a minority government in Ottawa which could fall at any time, so stay tuned to this blog for updates as they happen.

If you are a former student and are suffering under a burden of student loans, I suggest you contact a licensed bankruptcy trustee for a free initial consultation to review your situation.

Stay tuned…….