Good Faith, Hardship and Student Loan Discharges in Bankruptcy
Two years ago I wrote a post on What Constitutes Hardship with a Student Loan in a Bankruptcy in Canada.
Here’s an update; but first, some background.
A government guaranteed student loan is only discharged when you file bankruptcy in Canada if, you have “ceased to be a student” for at least seven years prior to filing. So, for example, if you graduated in May, 2005, you have to wait until June, 2012 before you can file bankruptcy and expect for your student loans to be automatically discharged.
There is a special rule that says that, in cases of “hardship”, the bankrupt may apply to bankruptcy court after five years to have their student loan reduced or discharged.
In addition, even if a student loan is more than seven years old, it is possible for the government to oppose the former student’s discharge and request that the bankrupt repay some or all of their student loan.
You read that sentence correctly: even if your student loan was more than seven years old when you went bankrupt, the government could object, and you could still end up being required to pay some or all of it back.
If a former student applies under the “hardship” rule for five year old student loans (section 178 (1.1)), or if a creditor opposes the discharge of a bankrupt even when the loans are more than seven years old, the student must satisfy the court of two conditions:
1. they acted in “good faith” with respect to their student loans.
2. they would experience financial difficulty if they were to try to repay the student loan.
What is “Good Faith”
In 2008 Deputy Registrar Mills in Toronto, in the case of Giera, Re, detailed four tests for “good faith”:
She said that the court is to examine whether:
- the money was used for the purpose loaned and if the education was completed,
- whether the Bankrupt is deriving economic benefit from the education,
- whether there were any reasonable efforts to repay the loans and
- whether there was any effort by the Bankrupt to take advantage of interest relief or remission options offered by the lenders.
These tests are relatively simple to understand. If you went to a private college and the college went out of business before you graduated, it’s unlikely they will make you pay it back. If you went to school to be a doctor, and you are currently working as a doctor, it is likely the court will make you repay the loan.
In this particular case the bankrupt had a student loan that was more than seven years old, but the government (the Attorney General) opposed her discharge.
She graduated from a dental technology programme, and got a job building orthodontic appliances, but it turned out she was allergic to the materials used in the process, so she had to quit that job and take a lesser paying job.
After graduation she did apply to defer her payments, and she did make numerous payments on her student loan until she filed her bankruptcy.
The Court concluded that the “Bankrupt lives modestly and within her financial means.” The court accepted “that she has struggled to live within her budget and she is to be commended for not turning to consumer credit to make ends meet. Although her employment appears to be stable, the Bankrupt does not earn an income commensurate with her education and is not likely to do so in the foreseeable future.”
However, despite all of this, the court concluded that the bankrupt has the ability to repay the principal amount of the student loan of $8,000, so her bankruptcy will not end until she makes full payment.
What is Hardship?
In addition to acting in good faith, the former student must also demonstrate to the court that they have and will suffer financial hardship if they are required to continue to repay some or all of their student loan.
Typically the court will review the bankrupt’s monthly income and expense statement to determine whether or not they have the resources to repay some or all of the loan. If the bankrupt is paying $1,000 for a leased car, and living in a $5,000 per month apartment, it’s likely the court will conclude they are living beyond their means, and therefore they should cut their expenses and use the savings to repay their student loan. If, however, they are working at a minimum wage job, and have three children to support, it’s likely the court will conclude that they don’t have the resources to repay the loan.
It should be noted that the court will consider your efforts to find work. In a recent case the court concluded that an educated man (a computer programmer) was not trying hard enough to find work, and therefore his application to discharge his student loan was denied.
So what does this mean for a former student with a student loan who goes bankrupt?
First, if you have ceased to be a student for more than seven years at the time of bankruptcy your student loan will be automatically discharged, unless the government objects to your discharge, which they will do on occasion.
Second, if they do object, you will be required to prove to the court that you have acted in good faith, and that you would suffer hardship if you were required to continue to repay the loan. If your loan was five years old and you want to apply to have it discharged you will have the same burden of proof.
Therefore, before declaring bankruptcy or filing a consumer proposal, you should consult with a bankruptcy trustee to assess the chances that the government may object to your discharge, and to confirm that you have in fact acted in good faith and would suffer hardship if you were required to repay the student loan.