Bankruptcy: The End or the Beginning?

Bankruptcy: The End or the Beginning?

Bankruptcy and Government Student Loans

Unpaid loans under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or similar provincial laws are problematic because of several economic, moral, and social factors. The subject is frustrating for students, governments, bankruptcy court, and our society.

A post-secondary (or other advanced) education is an appreciating asset attainable by capable students and, where necessary, by accessing affordable financing. Government-provided financial assistance is typically for lower-income students. It is unique financing because the most essential lending criterion is the financial need (not the future creditworthiness) of the student. The adage that the best borrower from a lender perspective is someone who does not need to borrow the money cannot be applied in the marketplace for government student loans.

The reality is that most college and university graduates do repay their student loans. Be that as it may, an alarming number of government student loans in Canada are not being repaid.

Before restricting most Crown claims in a bankruptcy to either the legislated deemed trusts or unsecured status since 1992, government student loans as Crown claims had preferred status (ranking ahead of unsecured creditors). The government student loan administrators routinely objected to a bankrupt’s discharge because any additional funds recovered were not shared with unsecured creditors. This did not solve the chronic problem of unpaid student loans.

In 1997, the BIA was changed to discourage going bankrupt to avoid repaying a student loan. Government student loans became one of the debts not released by a discharge from bankruptcy when the bankruptcy occurred while the debtor was a student or within two years (changed to 10 years in mid-1998) of ceasing to be a student. The bankrupt could be discharged from bankruptcy with the student loan still owing. Ten years after ceasing to be a student, the debtor could apply to the bankruptcy court seeking a release of the student loan debt. This is known as “the hardship provision.”

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C. J. Shaw, Q.C.
C. J. Shaw, Q.C., LL.M. is a member of the Alberta and Nova Scotia Bars and practises banking and insolvency law with Leon Bickman Brener in Calgary. He teaches Unsecured Creditors’ Remedies and Bankruptcy and Restructuring Law in the Faculty of Law, University of Calgary.

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