Canada Student Loan Bankruptcy Legislation

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.

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.