Could a Consumer Proposal be a Better Option for Student Debt Relief?
If you file bankruptcy in Canada, any creditor can oppose your discharge from bankruptcy. A creditor opposition is very rare. At my firm, Hoyes, Michalos & Associates Inc. in Ontario, creditors oppose a discharge in less than one case out of a hundred. In most cases a bankrupt completes their duties and they are automatically discharged, eliminating their debt and allowing them to begin their fresh start.
To oppose a discharge a creditor must hire a lawyer, who must appear in bankruptcy court and convince the bankruptcy court judge that the bankrupt should only be discharged if they fulfill additional conditions, which generally means “pay more money”.
Most creditors don’t go to the expense of hiring a lawyer to go to court to ask for more money. Most, but not all. There is one creditor that will sometimes oppose a bankrupt’s discharge and go to court and ask for more money: the federal government, where student loans are involved.
You might be thinking, “wait a minute; I realize that if a bankrupt has ‘ceased to be a student’ for seven years their student loans are eligible to be automatically discharged, so why would the federal government ignore federal law and attempt to collect more money even when a student loan is older than seven years?”
Good question. I assume the answer is “because they can”. The federal government passed a law saying that student loans are automatically discharged in a bankruptcy after seven years, but since it’s the federal government that also guarantees student loans, they want their money, so they will sometimes go to court and ask for more, even in a bankruptcy.
Are they successful?
They can be. The federal government can afford to hire the best lawyers, so in court they have a high success rate, particularly since a bankrupt generally cannot afford to hire the best lawyers.
If a significant portion of your debts are student loans, a bankruptcy is a risky debt relief alternative, even if you have ceased to be a student for more than seven years. There is no guarantee that the federal government will not object to your discharge from bankruptcy. It’s rare, but it can happen.
So what do I recommend? A consumer proposal is where you can get student debt help. In a consumer proposal, you can offer a reasonable repayment plan over a period of up to five years, and if the creditors accept it, you avoid bankruptcy and bankruptcy court. You know exactly what you are required to pay, and there is no chance that the federal government will decide, at the end, to ask for more money. They can’t. Once the proposal is accepted, that’s it.
What if the federal government doesn’t accept your proposal?
Your consumer proposal administrator can work with you to negotiate and offer more money. If ultimately a deal is not possible, you can still file bankruptcy. But wait! Doesn’t that mean I’m back in court? Perhaps, but now you have an advantage.
Section 173(1)(n) of the Bankruptcy & Insolvency Act says that a bankruptcy discharge may be granted conditionally (i.e. you have to pay more money):
if the bankrupt could have made a viable proposal, chose bankruptcy rather than a proposal to creditors as the means to resolve the indebtedness
If you go bankrupt and the federal government opposes your discharge, you can go to court and say “wait a minute! I filed a proposal, and they said no, so they can’t now ask for more money when they already said no to more money!”
It’s not an iron-clad defense, but it certainly helps your case that you tried to make repayment arrangements. So, if you have student loans, talk to a licensed insolvency trustee, and consider a consumer proposal as a way to deal with your student loans and avoid court.