Canada Student Loan Bankruptcy Legislation

On June 28, 2005 the House of Commons adjourned for the summer. As a result, Bill C-55 is currently on hold, and has not been passed into law.

The House will resume in the Fall. It is unknown whether or not this bill will receive Second and Third readings. An election is expected in late 2005 or early 2006; unless this Bill is passed before the election, this legislation will die.

Stay tuned to this space for further details.

Current status of legislation can be found here.

Bill S-28 in the Senate, discussed in a previous blog entry, has received second reading, but it is unlikely to pass. The current status of Bill S-28 can be found by clicking here.

Even though former students have been unable to automatically discharge student loans less than 10 years old (seven years under the newly proposed Bill C-55) if they go bankrupt, students could in the past file a consumer proposal. Canadian bankruptcy reform in Bill C-55 may change that.

The process was simple. If a former student had $25,000 in debts (say $15,000 in credit card debts and a $10,000 Canada student loan that was six years old), they could file a consumer proposal. If more than half of the dollar value of the creditors accepted the proposal, the proposal was accepted.

Thus by filing a proposal calling for payments of say $200 per month for five years, if the credit card companies accepted the proposal, the student loans also had to abide by the terms of the proposal, whether they voted for it or not (since more than half of the debts voted in favour of the proposal). Since at the conclusion of the term of the five year proposal the student loans were now eleven years old, the debtor was, in most cases, effectively able to discharge their student loans.

(Please note that this is an example for illustrative purposes only; the law is more complex than stated here, so you should contact a licensed trustee to review your specific situation before deciding if this approach will work for you).

However, Bill C-55, An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, contains an interesting amendment.

The proposed new section 68.28 (2.1) of the Bankruptcy & Insolvency Act states that “A consumer proposal accepted, or deemed accepted, by the creditors and approved, or deemed approved, by the court does not release the consumer debtor from any particular debt or liability referred to in subsection 178(1) unless the consumer proposal explicitly provides for the compromise of that debt or liability and the creditor in relation to that debt or liability has assented to the consumer proposal.”

The section that deals with the discharge of student loans is contained in section 178(1) of the Act. Specifically, section 178 (1)(g) of the Act states that the following debts are not automatically discharged in a bankruptcy:
(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; or
(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g).

Enough of the legal double-speak. What does this mean?

Simple. Under the amendments proposed in Bill C-55, a former student’s student loans, if less than seven years old, will only be discharged in a proposal if the student lender specifically votes in favour of the proposal.

Using our example above, if $15,000 in credit card debts voted in favour of the proposal, but $10,000 in less than seven year old student loans voted against, the proposal would be accepted, but the student loans would not be discharged. At the end of the proposal, the debtor may still be liable for the student loan debts.

Again, we must comment that the legislation has not yet been passed into law, and we are merely speculating as to the meaning of the proposed legislation. Our comments may be incorrect, so you should contact a licensed trustee to get advice on your specific fact situation.

Stay tuned to this space for further updates, or post your comments by clicking on the Comments button below. The current status of Bill C-55 can be found on the Parliament of Canada’s web site.

After much anticipation the government has finally introduced Bill C-55, succinctly titled: An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts.

In what is probably the biggest disappointment to former students, the much anticipated reduction in the student loan discharge period was not substantially reduced.

Since November, 2003 when the Senate Committee on Banking, Trade and Commerce released a report called Debtors and Creditors: Sharing the Burden: A Review of the Bankruptcy and Insolvency Act, former students have hoped that the government would reduce the discharge period on student loans from 10 years to 5 years, as recommended in the above noted report.

Under current law, a student loan is only automatically discharged in a bankruptcy if it has been more than 10 years since the debtor ceased to be a full time student.

If Bill C-55 passes, subparagraph 178(1)(g)(ii) of the Bankruptcy & Insolvency Act will be amended to reduce the period from ten years to seven years. In other words, if you have ceased to be a full time or part time student for seven years when you go bankrupt, your student loans will be automatically discharged.

To soften the blow, the bankrupt may apply to the court if their student loans are more than five years old, and the court may discharge the debt if the bankrupt has acted in good faith, and 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 our experience it is difficult to apply to a court for anything without a lawyer, so most former students will need to wait seven years before going bankrupt to have their student loans discharged.

We will continue to review the progress of this legislation and post updates as they happen.

On March 23, 2005, Liberal Senator Wilfred P. Moore introduced Bill S-28 in the Senate, An Act to amend the Bankruptcy and Insolvency Act (student loan).

As with previous bills noted in this blog, the legislation proposes reducing the discharge period for student loans in a bankruptcy from ten years to five years.

Debates on the bill occurred on April 19, 2005 and May 3, 2005.

Although the bill was presented by a member of the governing Liberal Party, it is doubtful that a bill, introduced in the Senate, will pass in both the Senate and the House of Commons before the current sessions ends, or the government is defeated, whichever comes first.

Stay tuned to this space for further developments.