Canadian Bankruptcy Reform: Student Loans: The disgrace of Canadian bankruptcy law.

The new bankruptcy laws, which were rushed into law on November 25, 2005, just before the defeat of the Liberal government on November 28, 2005, will not come into force until June 30, 2006 at the earliest. The Senate was promised the opportunity to review the legislation and hear the scores of experts and special interest groups who were scheduled to make submissions. There is the hope that this flawed legislation will not be enacted without significant changes.

The new law, which passed on November 25, 2005, states that student loans will be eligible to be written off in a bankruptcy if the student has terminated his studies seven or more years ago. This is a decrease from the current ten-year wait. In cases of undue hardship, a bankrupt may apply to court to obtain a discharge of the student loans after five years.

I am opposed to this law for three main reasons:

1. The law is discriminatory and draconian. It is also in violation of one the major tenets of Canadian bankruptcy - that an honest but unfortunate debtor deserves a fresh financial start. Students are the only people who go into bankruptcy and cannot get their dischargeable debt erased in 9 months like all other debt. A person can owe CRA tens of thousands of dollars because of a failed business or because they didn’t pay their income tax. These people are eligible to have their debt erased in nine months but not students for their debt.

2. The law penalizes students for youthful mistakes. Most people think students should pay a severe price for not paying back their students loans because they think the student has now got a good education and can earn significantly more money because of their education. If this were the case I too would want stringent penalties placed on these students.

The reality is quite different. In my practice the vast majority of students who wanted their student loans erased in a bankruptcy were students who did not get a good education that would earn them significantly more money. They either got degrees like a BA which did not qualify them for any additional monies or more commonly they did not finish their studies. Many of the people I saw took hair dressing courses and courses to work in the hospitality industry. This qualified them for jobs paying minimum wages.

Did these students make mistakes? Yes, they did. Perhaps they were too optimistic about their job prospects. Perhaps they didn’t work hard enough to pass their studies. Perhaps they didn’t stop to think that when the course was finished they would only be qualified to make minimum wages. They made mistakes but isn’t that what youth is all about? As young people we have all made mistakes but we learned by our mistakes and moved on.

3. The penalty for students is too severe. It is a legal maxim that the punishment should fit the crime. The vast majority of people with hardship student loans don’t have the income to pay back their student loans. These people are hounded by bill collectors and are under threat to have their wages garnisheed.
Some are forced to work in the underground economy where they do not pay income taxes. Some had to leave the country to find work where they would not be harassed by bill collectors. Many never get the chance to build a financial life and build for their future.

I favour the recommendation of the Canadian Association of Insolvency and Restructuring Professionals; CAIRP, that calls for the court to have the authority, at the discharge hearing to grant full or partial relief.

The Report of the Senate Committee on Banking, Trade and Commerce November, 2003, recommended that the wait before student loan debt could be discharged in a bankruptcy be reduced, to five years following the conclusion of full or part time studies.

The true story of why Canadian bankruptcy reform was rushed into law.

It was apparent at the beginning of November, 2005 that the Liberal minority government was going to be defeated as it had lost the support of the NDP party. We at the Bankruptcy Canada Blog, felt that the proposed changes to bankruptcy legislation would be postponed as there were months of hearings from scores of experts and stakeholders still to be heard by the Senate Committee. We were shocked when we found out that Bankruptcy Reform had been rushed into law on November 25, 2005.

What could have caused such unseemly haste we wondered? Fortunately, we have an exclusive insider report from top Canadian investigative reporter Goldie La Press.

The Inside Report: Rushing Bankruptcy Reform into law.

By GOLDIE LA PRESS
Ottawa, January 5, 2006.
Bankruptcy Canada Blog

In order to get some insight into the pre election political process I took a position as a waitress at the House of Commons Food Services. I was assigned to serve refreshments at a November 22, 2005, 10:00 am meeting attended by Paul Martin, Jack Layton, Steven Harper and Gilles Duceppe.

After serving them Beluga Caviar and Champagne I waited in a corner of the room. The following is what transpired:

Jack Layton spoke first.

“I called this meeting because of a telephone call I received late last night from Buzz Hargrove,” Layton haughtily announced. “Yes, that’s right. Buzz Hargrove, the head of the CAW, called me personally,” Layton gloated.

As Layton spoke these words both he and Paul Martin clutched at their forelocks in an involuntary show of subservience and respect. Steven Harper looked envious and could be heard to mutter in a whiney voice, “Buzz never calls me.” Gilles Duceppe just looked on in awe.

“Well,” Layton continued. “Buzz is upset because he knows the government’s going to be defeated on November 28th and he wants the Wage Earner Protection Program passed into law before then because he promised his guys it would be done.”

“There’s not enough time,” Paul Martin interjected.

“Paul, how many times have I told you that I don’t like being interrupted by you when I’m speaking,” Layton said crossly, casting a withering look at Paul Martin.

“I’m sorry, Jack,” Martin said in a contrite tone of voice.

“Just don’t let it happen again,” Layton scolded. “Now, does anyone have any serious objections to this?”

“We can’t do that because the proposed legislation as it stands is flawed,” Gilles Duceppe pointed out. “It requires many changes which I think we all recognize. I’ll give just one example. The way the law treats student debt is unconscionable, unfair and discriminatory because students are the only group that cannot wipe out their debt in a bankruptcy in the time afforded all other dischargeable debt, and that includes income tax debt too! It is also in violation of one of the major tenets of Canadian bankruptcy - that an honest but unfortunate debtor deserves a fresh financial start. Why, we have students in the same category as deadbeat dads who have not made their alimony or maintenance payments, people who obtain assets by misrepresentation and awards of damages by a court for intentionally inflicting bodily harm or sexual assault. The new proposed legislation requires a wait of seven years before student loan debt can be erased in a bankruptcy.”

“Gilles, students and young people in general don’t vote,” Layton pointed out. “Duuh!”

Martin and Harper nodded in agreement at these words.

“What about the Senate? They have to have a sober second look at this legislation,” Duceppe said in a final attempt to win the other three over to his point of view.

This comment was greeted by uproarious laughter from the three. “Sober second look,” someone called out. “Not if it’s in the afternoon after their lunch, wine and cocktails.” This was greeted by more laughter to which Duceppe joined in too.

“Don’t worry about the Senate,” Martin said. “They’ll do what we tell them to do.”

“OK guys. It’s decided then. We pass the bill into law before the government is defeated. Right,” Layton said.

The other three agreed.

“Can I call Buzz and tell him the good news?” Martin pleaded. “Can I, Jack?”

“No Paul. You can’t do that. Buzz called me first so I’m going to call him back. Not you,” Layton said firmly.

As they got up to leave Steven Harper noticed that there was still lots of caviar and Champagne left over. “What are we going to do with all of this?”

“Don’t worry Steven,” Paul Martin said. “We’re going to donate this to a food bank so we can help the poor people.”

“Good idea! Super thing to do for the poor people,” they all agreed.

Layton was overcome with emotion at the thought of the good they were doing for the poor people and wiped a tear from his eye as he and the others left the meeting room.

email address for Goldie La Press