Hardship Provisions and Student Loans in Consumer Proposals

I have written extensively on the hardship provisions in the Bankruptcy & Insolvency Act, including What Constitutes Hardship with a Student Loan after Bankruptcy in Canada? and Good Faith, Hardship and Student Loan Discharges in Bankruptcy.

In summary, under section 178(1.1) of the Act:

(1.1) At any time after five years after a bankrupt who has a debt referred to in paragraph (1)(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that

  • (a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and
  • (b) 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 simple English: a student loan is automatically discharged in a bankruptcy if, at the date of bankruptcy, more than seven years has elapsed since the bankruptcy ceased to be a student.  Under the hardship provision, after five years you can apply to court to have the student loan discharged, provided you can demonstrate hardship (see the articles referenced above for more details).

The same seven year rule applies, so a student loan is automatically discharged if you have been out of school for seven years when you file your proposal, and you complete your proposal.

But what about the hardship provision? Can you ask for forgiveness under the hardship rule after five years if you file a consumer proposal?  Up until this month, the answer was “no”.

In October 2012 a Toronto bankruptcy court judge ruled (and I’m simplifying here) that since the Act refers to a bankruptcy, it does not apply to someone who files a consumer proposal.  That is certainly the plain meaning of the Act, and presumably if Parliament had wanted the section to apply in both bankruptcies and proposals, that’s what they would have said.

However, in the case of Re Cardwell, 2006 SKQB 164, Registrar Herauf stated that, logically, the sections should apply in both bankruptcies and proposals, since not allowing this section to apply to proposals discourages people from filing consumer proposals.

So, on appeal, Mr. Justice H. J. Wilton-Siegel of the Superior Court of Justice – Ontario ruled on March 15, 2013 that the hardship provisions apply in a consumer proposal and in a bankruptcy (the case citation is Eric Joseph Sitler (Re): 2013 ONSC 1576.

What does this mean, in plain English?  Simply put, if you file a consumer proposal when you have ceased to be a student for more than five years but less than seven years, although the student loans are not automatically discharged, you can apply to court to get relief from your student loans, just as if you had filed bankruptcy.

Sound complicated?  It is, so contact a consumer proposal administrator to request a no charge initial consultation to review your options and determine which option is best for dealing with your student loans.

Published on Monday, March 18th, 2013