Canadian Student Loans and Bankruptcy.

July 7, 2008 New Student Loan Bankruptcy Laws go into effect.

Student loan debt will be eligible for discharge in bankruptcy if seven years have passed since the former student ceased to be a full or part time student.   The Court has interpreted the meaning of “ceased to be a full or part time student” in section 178(1) (g) to not include periods of time when the bankrupt was a student but received no student loans.  (Re Ledoux, 2005 SKQB 75, 8 C.B.R. (5th) 225)

This applies to debtors who file bankruptcy on or after July 7, 2008 and to debtors in bankruptcy but not discharged as at July 7, 2008.

In the case of a debtor, with student loan debt, who is paying on a proposal and now is within the 7 year period he should talk with his trustee and be advised how to proceed to have the student loan debt discharged.

In addition, in cases of undue hardship, a bankrupt may apply to the Court to obtain the discharge of the student loans after five years. For the Court to discharge on hardship grounds, it must be satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties.

NEWS FLASH, DECEMBER 14, 2007- It was announced today that Bill C-12 - 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 has received Royal Assent.

It is not yet known when the new laws will be in force.

Student Loans: Student loan debt will be eligible for discharge in bankruptcy if seven years have passed since the former student has terminated his/her studies. In addition, in cases of undue hardship, a bankrupt may apply to the Court to obtain the discharge of the student loans after five years. For the Court to discharge on hardship grounds, it must be satisfied that the debtor has acted in good faith and is expected to continue to experience financial difficulties.

Visit our Student Loans Blog.

May 29, 2007 - Bill Introduced to Change Student Loan Non-Dischargeability in a Bankruptcy from 10 Years to Two Years.

On May 29, 2007 Senator Yoine Goldstein introduced Bill S-227 in the Senate, entitled An Act to amend the Bankruptcy and Insolvency Act (student loans). The Bill received first reading on that date.

The Bill, if enacted, will amend the student loan provisions, ss. 178(1)(g) and (1.1), so as to provide for:
• a non-dischargeability period of two years from the end of studies (reduced from the current ten years).
• the mercy, or hardship, hearing (in which the court may discharge a student loan despite the bankruptcy having been filed during the non-dischargeability period) may take place at any time, rather than, as at present, only after the expiration of the non-dischargeability period; and
• the court may, at the mercy hearing, fix payment terms and conditions for the student loan, and may discharge part of the debt (rather than all or nothing, as under current jurisprudence:

Senator Goldstein is one of Canada’s leading insolvency lawyers who, before his recent Senate appointment, chaired the Personal Insolvency Task Force and acted as advisor to the Senate Banking Committee’s hearings in 2005 on Bill C-55. Evidently it is his intention to fold this Bill into the Senate hearings that will consider Bill C-62 (the 2007 amending bill) in the autumn, in which he is sure to play a very prominent role.

For more information please refer to Senator Goldstein’s speech to the Senate where he presented background history on student loans and well reasoned arguments for the reduction of the 10 year wait period before student loans can be erased in a bankruptcy.

Thanks to Bob Klotz for bringing this to our attention.

News Flash! April 26, 2006:

Alexa McDonough's private member's bill, C 228, to reduce the wait before a student can claim bankruptcy for his or her student loans from 10 years to 2 years, received 1st. reading on April 26, 2006.

Students should not get their hopes up as a private member's bill almost never gets passed.

   The progress of this bill can be tracked via this link.

News Flash April 12, 2006:

The new bankruptcy laws that would have reduced the wait, before student debt could be erased in a bankruptcy, from 10 to 7 years, has been put on hold. No one know when or if the new laws will be enacted. For more infomation please see this link: http://www.bankruptcycanada.com/blog/canadian-bankruptcy-reform-on-hold/

New Bankruptcy Laws will reduce the wait, before student debt
can be erased in a bankruptcy, from 10 to 7 years

June 30, 2005 - Justice Gordon Sedgwick of Ontario Superior Court ruled today that student loan debtors don't constitute a specific group that should be protected from discrimination under the Charter of Rights and Freedoms.

This means that the law stating that student loan debt cannot be erased in a bankruptcy until the student has been out of school for 10 or more years remains law.

This law was rushed through parilament and made law in June of 1998. The law is seen by almost all insolvency professionals as unfair and discrimnatory because students are the only group that cannot wipe out their debt in a bankruptcy in the time afforded all other dischargable debt.

The Report of the Senate Committee on Banking, Trade and Commerce released in November, 2003 recommended that student debt be eligible to be erased in a bankruptcy five years after the student completed his or her studies. In cases of hardship the recommendation was that the court be allowed to discharge student loan debt in a period of time shorter than five years.

The Bankruptcy Reform Bill introduced in Parliament on June 3, 2005 calls for student debt to be eligible to be written off in a bankruptcy if the student has terminated his or her studies seven or more years ago. It also stipulates that, a bankrupt may apply to court to obtain a discharge of the student loan after five years in cases of extreme hardship.

Canadian Federation of Students News Release     

Ottawa Citizen article dated July 5, 2005

More information on proposed changes to to the insolvency laws

The NDP MP's private member's bill - which would have allowed former university students to file for bankruptcy two years after they finished studies rather than having to wait for 10 years - was voted down 169-105 Wednesday in the House of Commons.

This includes the proposed change to reduce the time a person
has to wait to get Student Loans erased in a bankruptcy
and proposal from 10 years to 5 years. More

One of the changes being considered is changing the time a person has to wait to get Student Loans erased in a bankruptcy and proposal from 10 years to 5 years.

Under current legislation, student loans are debts that are discharged by Bankruptcy only if the date of bankruptcy is more than ten years after leaving studies. 

If there is a bankruptcy before or within ten years following the leaving of studies, a Court can order the discharge from a student  loan, once the ten years has passed, if the person has acted in good faith and the person will continue to experience financial difficulty in paying the student  loan.
 

June 12, 1998 Submissions by the CBA and the CIPA against the "10 year Amendment"

Effective May 11, 2004, borrowers who declare bankruptcy while still in school will be eligibile for new loans and interest-free status as well as interest relief and debt reduction of their loans.

This program is not retroactive. This means that this program will apply only to borrowers who participate in a bankruptcy related event on or after May 11, 2004.

Prior to this program going into effect, borrowers who participated in a bankruptcy related event (bankruptcy, consumer proposal, scheme for the orderly payment of debts) were restricted from receiving new loans, interest-free status, Interest Relief and Debt Reduction in Repayment. This program will provide Interest Relief and Debt Reduction in Repayment to borrowers who become subject to the Bankruptcy and Insolvency Act. Borrowers who declare bankruptcy while still in school will now be able to continue with, and conclude, their current program of study. These students will be eligibile for new loans and interest-free status.

• Will have to remain in the same program they were in as at the date of the bankruptcy event;

  Maintain full-time status in the program of study (i.e. enrolled in a minimum of 60% of a full-course load or 40% in the case of a student with a permanent disability;
  
  
• Submit the required documentation indicating their intention to remain in study.