The volatile history of student loans makes it clear that the government and stakeholders are still wrestling with the best and fairest way to deal with student loans in a bankruptcy.
The current law dictates that student loan debt cannot be included in a bankruptcy discharge if the student has not been out of school for less than 7 years.
Student Loan Hardship
In a hardship situation, the court can discharge the student loan debt, once five years has passed since the schooling, if the bankrupt has acted in good faith and will continue to experience financial problems such that the bankrupt will be unable to pay the debt.
Prior to September 30, 1997 – Student Loans were erased upon a discharge, the same as all unsecured debt.
September 30, 1997 – Student Loans were discharged, if at the time of the bankruptcy, the student had been out of school for two or more years.
June 18, 1998 – Student Loans were discharged, if at the time of the bankruptcy, the student had been out of school for ten or more years.
July 7, 2008 – Student Loans were discharged if, at the time of the bankruptcy, the student had been out of school for seven or more years. A hardship provision was included which gave discretion to the courts to discharge the student loan debt after five years, if it is the opinion of the court that the bankrupt has acted in good faith and will continue to experience financial difficulty such that the bankrupt will be unable to pay the debt.
The future – A review of Canada’s insolvency laws was tabled in the House of Commons Tuesday, October 21, 2014. This is the start of proposed changes to the Bankruptcy and Insolvency Act.
CAIRP (Canadian Association of Insolvency and Restructuring Professions), the governing body of Trustees in Bankruptcy, recommends:(a) that the student loan be eligible for a discharge in bankruptcy, if the student has been out of school for 5 or more years; and(b) that the waiting period for a hardship application be the date of the debtor’s automatic discharge or the date of the debtor’s actual discharge hearing.
One of the main reasons there is such difficulty in coming to grips with a fair and equitable system is the way in which the loans are granted.
A major problem is that there is no requirement that the applicant must have a minimum grade point average nor is there a requirement that the person is taking a course that will give him/her a reasonable payback for the cost of the course.
Because there is no requirement of a minimum grade point average many loans are granted to students, who do not have the academic qualifications to complete their selected course of studies.
In my practice, the overwhelming number of students I saw, who wanted their debt discharged in a bankruptcy, did not complete their studies and were in low-paying, often minimum wage jobs.
Another problem I saw, at first hand, was the person who paid, for example, for a hairdressing course. The course was very expensive yet the pay for a qualified hair dresser is very low — at or close to minimum wage.
These people cannot afford to pay back their student loans.
Some people say that these people abused their student loans.
Others say that mistakes were made but that youth is the time to make and learn by mistakes.
I feel that we put an unfair burden on these students by sentencing them to be pursued by credit collectors until seven years has passed before the student can seek debt relief in a bankruptcy.
It is ironic that one of the issues being reviewed for change in this go-around of the review of Canada’s insolvency laws is the issue of responsible lending.
The talking points produced are:
Credit grantor behaviour may also contribute to financial difficulty for some creditors. For example, credit granting practices such as extending credit on onerous terms to individuals who are unable to meet their existing financial obligations can lead to higher rates of insolvency.
Possible responses could include empowering the trustee or court to disallow the claim of a creditor where credit was extended improvidently or on unconscionable terms. Additionally, the lender could be required to repay payments made on such loans in the period leading up to a bankruptcy or proposal.
The concept of responsible lending should be applied to student loans in the review of Canada’s bankruptcy laws. Student loans should be released at the time of the bankrupt’s discharge, the same as all unsecured debt.
If the federal or provincial student loans agencies feel there is abuse of the system they have the right to oppose the discharge of the bankrupt.