Are Student Loans Collectors Becoming More Agressive?

As readers of this blog know, the bankruptcy in Canada and student loan rules changed in July, 2008. Under the new rules, a student loan is automatically discharged in a bankruptcy, or a consumer proposal, if you “ceased to be a student” for more than seven years prior to filing (the old rule was a ten year rule).

Recently two of the largest lenders have become more aggressive in their collection efforts.

In the first case, a number of former bankrupts got letters from a major bank regarding their student loans. In the typical scenario, the former student went bankrupt; at the time of their bankruptcy their student loans were more than 10 years old (or seven years old under the new rules), so they assumed their student loans were automatically discharged. After their bankruptcy finished, and they were discharged, they received a letter from the bank stating that they required a court order specifically discharging their student loans. If the person didn’t provide a court order within 30 days, the lender threatened to turn their account over to a collection agency.

So, even though the loan was discharged in the bankruptcy, and even though the lender didn’t object to the discharge, the lender was going to bully the former student into paying their loans.

It disgusts me that a major chartered bank in Canada would do this, but I guess even large institutions can be bullies. When we first heard of this (it happened to a number of my firm’s former bankrupts), we immediately contacted a lawyer, who sent a letter to the bank. A few days later the bank backed down, and apologized, saying it was a mistake, and they promised to send letters of apology to the debtors impacted.

Here’s my question: how many people fell for this? How many people started making payment arrangements? How many people didn’t deal with a trustee that was able to contact a lawyer and sort this out? I’m glad this problem appears to be solved, but it is a worry for the future. They backed down now; will they try it again in the future?

I had another former bankrupt contact me to advise that the bank was pursuing her for a very old student loan. Her proposal was completed six years ago, and at that time her student loan was not ten years old (as the rule was at the time), so it wasn’t automatically discharged. It surprises me that it would take student loans six years to decide to pursue someone.

In the final case this past week, a debtor filed a consumer proposal, and he knew that because his student loan was only three years old, it would not be automatically discharged. Within a few days of filing he got a letter from the lender advising that they would be happy to continue to accept payments from him. Since the loan is not dischargeable he can continue to make payments. Of course he is not legally required to resume payments until his proposal is finished; the letter he received didn’t explain his options in full.

So, even though you filed for bankruptcy and assume your student loans are discharged, the process may not be finished. It’s important to choose a reputable trustee to help you through the process, so that they are there to help even after the process is finished.

Published on Tuesday, March 30th, 2010