Canada Student Loan Bankruptcy Legislation

Section 178 1(g) of the Bankruptcy & Insolvency Act states that the following debts are NOT discharged when you declare bankruptcy in Canada:

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

In summary, government guaranteed student loans are only automatically discharged if you have “ceased to be a student” for more than seven years prior to when you declare bankruptcy.

What does “ceased to be a student” mean?  In general, it means that once you leave school, you have ceased to be a student.  For example, if you got a student loan in September 2000, and graduated in May, 2004, you ceased to be a student at the end of May, 2004.  You would probably want to avoid filing bankruptcy prior to June, 2011 (seven years after you ceased to be a student).  They key here is that it is not when you got the loan, but when you ceased to be a student that matters.

Let’s continue the example by assuming that you went back to schoold for a year, from September 2007 to April 2008.  You therefore were a student, again, until April 2008, so you ceased to be a student in April, 2008.  In that example your student loan would not be automatically discharged in a bankruptcy prior to May 2015.

A strict reading of the legislation indicates that it is ceasing to be a student that is the critical date.

However, to complicate this discussion, there was a court case in 2005 that addressed this issue (Re Ledoux, 2005 SKQB 75, 8 C.B.R. (5th) 225).  In this case the bankrupt left school in 1989 (her education was funded in part by Canada student loans).  She then returned to school between 1992 and 2000, but did not receive any student loans to return to school.  She then went bankrupt in 2004.

The Bankruptcy Registrar (the judge) in this case decided that, for the purposes of the student loans, she ceased to be a student in 1989.  That was the last year she was a student for which she received student loans.  So, in her case, her student loans were discharged in the bankruptcy.

This case indicates that once you cease to be a student funded by government guaranteed student loans, the seven year period begins.  If you return to school but don’t get any further student loans, the seven year period does not restart.

Obviously this is good news for any former students who return to school, and pay for it without government student loans.

A word of caution: This case is a case from Saskatchewan.  Decisions of the Saskatchewan court are not necessarily binding in any other province.  The courts will typically consider decisions of other courts, but they are not necessarily bound by them.

To conclude, if you were a student, and then returned to school, you should speak to a licensed bankruptcy trustee in your province to get advice on how to determine the exact end of study date before you make a decision to file bankruptcy.

As of today there is still no word on when the new rules regarding student loans and bankruptcy in Canada will come into force. The Senate continues to hold hearings on the proposed new rules. It is possible that the Wage Earner Protection provisions will be implemented before the rest of the rules, but that is pure speculation at this point. I can only guess that the rules will be proclaimed into force later this year, but that is just a guess.

So how will you know when the rules do come into force? We have added a form in the top right hand corner of this page. You can submit your name, e-mail address and phone number, and we will notify you as more information becomes available. Don’t worry, I promise not to sell, rent, or disclose your contact information; all you will receive is an e-mail alert as changes happen.

In other news, the fight continues for more fair rules for former students. I’ve been fighting for many years already. (Check out the Office of the Superintendent of Bankruptcy’s web site; in footnote #34 they quote my student loan comments from 2005). In my last blog post about the new rules I discussed my testimony before the Senate Committee on February 7, 2008. You can now view my opening remarks on You Tube:

Other people are fighting as well. On February 27, 2008, Bob Klotz, one of the top insolvency lawyers in Canada, also appeared before the Committee. You can read his full testimony on the Klotz Associates web site.

In his testimony Mr. Klotz agreed with my approach. He said that, referring to the period for discharge of student loans, “we prefer that it be as short as possible.” He then went on to make what I believe was the most insightful comment I have heard on the subject (I wished I had said it myself). He said that reducing the period to two years would be largely meaningless, because with interest relief periods most students would not be going bankrupt that quickly anyway. However:

“We think that if this period was brought down to two years ….it will serve the function as acting as a guide to the courts.”

Bingo. Mr. Klotz is of the opinion, and I agree, that because this rule exists, the courts naturally assume that former students should be treated harshly. This “harshness” effect is caused by the existence of the provision (s. 178(1)(g)), rather than the exact number of years it specifies, and therefore it’s okay to reduce the period. By reducing the period to two years, the courts will be more understanding of the position of former students in financial difficulty, and will hopefully therefore be more amenable to allowing student loans to be discharged without conditions when discharge hearings are required.

Information on Mr. Klotz can be found on the Klotz Associates web site. Information on bankruptcy and student loans, and how to find a bankruptcy trustee in Canada. For e-mailed updates, complete the form at the top of this page, and thanks for reading.

As I reported last month, on December 14, 2007 the new bankruptcy rules received Royal Assent. However, as of today, they have not yet come into force.

That means that the old rules are still in effect: Student loans are only automatically discharged in a bankruptcy if you have ceased to be a student for 10 years or more at the time you go bankrupt.

When will the new rules come into force? As of today, we don’t know. As soon as we do know, I will post it here.

Also, on February 7, 2008 Ted Michalos and I will be testifying before the Senate Standing Committee on Banking, Trade and Commerce. I will be arguing for a reduction in the student loan rule from 10 years currently to 2 years (the new legislation proposes 7 years). The chances of any further changes happening at this time are slim, but I’ll give it a shot.

You can watch the testimony live on the internet at noon eastern time on February 7 on the Senate web site. I’ll report back as to how it went.

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.

On Tuesday June 12 The House of Commons passed the Minister of Finance’s Ways and Means Motion, which is the first step before a bill dealing with taxation is introduced. This will include Bill C-62, the bill amending c. 47, which is the bill that is designed to make amendments to the Bankruptcy & Insolvency Act.
On Wednesday June 13 the Minister of Labour introduced Bill C-62 in the House of Commons, and it received First Reading.

There is speculation, as yet unconfirmed, that all parties will agree to fast-track the amending bill through First, Second and Third Readings in the Commons this week, without the need for committee hearings. This would enable the legislation to be sent directly to the Senate.

Unfortunately, it is now June, and Parliament will likely rise for the summer on June 22 (because we all need a three month summer break), so even if the bill passes the House of Commons the Senate will likely refer the bill to the Standing Committee on Banking, Trade and Commerce for public hearings, which are unlikely to occur before October, 2007.

You can read the text of the bill on the government’s web site.

Based on my quick review of the legislation I don’t see any changes to the student loan rules, but I may have missed them, or they may be added at the Committee stage. Stay tuned to this space for more information as it becomes available.