Student Loans and Bankruptcy
Often, many individuals who are facing financial troubles and who may be contemplating either a Consumer Proposal or Bankruptcy will likely also have to consider the impact of their student loans within the process. This article is intended to provide some information regarding Bankruptcy and impact of student loans on the process.
Student loans are provided by the Government to encourage persons interested in pursuing a post-secondary education. Federal and Provincial Governments work with each other under a contractual framework for receipt and disbursement of funds by the Province for this purpose.
Government financial assistance is provided in the form of Grants and Loans. It is important to distinguish between a Grant and a Loan.
Financial assistance provided by way of Grants is not required to be paid back. However, financial assistance provided in the form of Loans, is statutorily required to be paid back.
It would also be pertinent to note that only students receiving admission to designated educational institutions, as mentioned under the Canada Student Financial Assistance Act S.C. 1994 are provided Government loans. In other words, the intended educational institution must be recognized by the Government. The loan agreement is entered directly between the Government and the qualifying student.
In Ontario for instance, the financial assistance program is called Ontario Student Assistance Program (“OSAP”). OSAP contains pre-requisite conditions regarding the eligibility, availability and repayment of the loan.
Re-payment of Student loans
The repayment period for the OSAP loan is 10 years. This can be extended for a period of 15 years by application and by demonstrating sufficient cause by the applicant. The student loan however, will become due and payable only after the student becomes a graduate. This is a key feature that makes Government programs such as OSAP more appealing to students as compared to loans from a private institution, where at the minimum, interest portions on the loan amounts become due immediately.
Students who take OSAP are provided with a grace period of 6(six) months after the time they cease to be students. The Loan becomes payable after this period.
Nevertheless, re-payment of student loans remains mandatory. Stringent measures are adopted by the Government to ensure re-payment of student loans, as failure to repay student loans jeopardizes the loan system resulting in large deficit of government funds. This hinders the ability of future students to benefit from government financial aid.
Non-repayment of student loans can cause severe financial consequences and legal consequences such as garnishment of wages, and bad credit rating to defaulting individuals.
Bankruptcy and Insolvency Act, 1985
Persons declaring Bankruptcy are governed under the Bankruptcy and Insolvency Act, RSC 1985 (“BIA”).
The purpose of BIA is to provide a fresh start to honest debtors by discharging their liabilities, pre-existing their respective Bankruptcy.
However, the BIA also prevents individuals from taking advantage of the Bankruptcy system by absolving themselves of an obligation or a loan that will eventually enable them to earn income in the future. Student loans fall into this category, as the loan would theoretically enable a person availing an education to earn an income from his education in the future.
View of the Courts
Obtaining a post-secondary education is considered a long term asset as it will continue to generate income. The integrity of the Bankruptcy and Insolvency system would be undermined if the debtor were to retain the entire benefit of the asset without the creditors having a share. This was held in a decision of the Court of Queens Bench of Alberta Re Dolgetta at para. 45 (2008 ABQB 556 Canlii). This view is usually followed in cases where the debtor evades repaying the student loan, despite having received employment as a result of the education.
A Sympathetic Approach
However, Courts have in several cases, taken a sympathetic approach to student loan Bankruptcies, where students do not find work relating to their education or fail to complete the course. Conditional discharge orders are usually granted by Court, if it is established that the education has not been successful or will not otherwise benefit the bankrupt in the future. These conditional orders usually consist of directions to the debtor to repay the loan amount in the form of minimum monthly payments over a time period fixed by Court to a bankruptcy Trustee. A bankruptcy Trustee oversees the assets assigned by the bankrupt and ensures repayment of the debts to the creditors.
In cases of financial difficulty, the debtor will be permitted to make monthly payments of small sums over a period of time keeping in mind a reasonable lifestyle and surplus income of the debtor. The basic idea is to rotate government financial assistance by granting aid to aspiring students while ensuring repayment of student loans by students who have successfully completed their education.
An order of discharge
An order of discharge under the BIA releases the debtor from all provable claims of the creditors on payment of creditors. Discharge orders are passed by the Superior Court in Ontario. Discharge orders are either automatic or conditional.
The BIA stipulates that any debt or obligation relating to a student loan will not be released by an order discharge. An excerpt of Section 178 of the BIA states as follows:
178. (1) An order of discharge does not release the bankrupt from…
(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 seven 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).
(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.
Therefore, in relation to a debt or obligation relating to a student loan, the factors to be considered are
- The date of the bankruptcy
- The time when the bankrupt ceased to be a full-time /part-time student
Also, the Court may consider an application for discharge made by a bankrupt 5 years after ceasing to be a full-time/ part-time student if it is demonstrated that
- The debtor has acted in good faith towards repayment of the loan and
- The debtor will continue to face financial difficulty so as to be unable to repay the debt
Student Loans within Bankruptcies are complex, and an individual should not rely on lay advice or information. It is highly advisable to tread cautiously when an individual debtor of a student loan, is considering a Consumer Proposal or a Bankruptcy. Trustees can provide information, advice and options.
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