Bankruptcy: The End or the Beginning?

Bankruptcy: The End or the Beginning?

A government MP speaking in the House of Commons in May 1997 explained the rationale for making that change to the BIA: “Students who receive financial assistance from taxpayers owe it to society and to future generations of students to reimburse the loans they have received. At the same time, however, the governments and bankruptcy laws have to recognize that some students may find themselves in a hardship situation. This is reflected in the legislation by limiting the period during which student loan debt would be non-dischargeable.”

Since July 7, 2008, government student loans are excluded from the claims released by a discharge from bankruptcy when the bankruptcy occurred while the bankrupt was a student or within the seven years (reduced from 10 years) after the bankrupt ceased to be a student. This change applies to a bankrupt who was not yet discharged as of July 7, 2008 or a person who became bankrupt on or after July 7, 2008. The applicable federal or provincial student loan legislation determines when the person ceased to be a full-time or part-time student. The BIA also stipulates that five years after ceasing to be a student (reduced from 10 years), the bankrupt (or an already discharged bankrupt) may apply to the bankruptcy court requesting the restriction on the release of the student loan debt be removed. The bankrupt must show that he or she “has acted in good faith in connection with the bankrupt’s liabilities under the debt; and … has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.”

Some “good faith” indicators which a bankruptcy court may consider are:

  • was the money used for the purposes of the loan?
  • did the bankrupt complete the educational program?
  • was economic benefit derived from the education?
  • have reasonable efforts been made to repay the loan?
  • was the availability of interest relief and remission used to reduce the burden of the loan?
  • what was the timing of the bankruptcy?
  • was the student loan a significant portion of the bankrupt’s total indebtedness?

The bankruptcy court will respond favourably to the request for release from a government student loan debt when the answer to each of the first five questions is yes. The court will likely respond more negatively where the timing of the bankruptcy was to avoid the student loan debt and the student loan was a significant part of the bankrupt’s total indebtedness. The bankruptcy court cannot ignore or condone misuse of publicly funded student loans.

A non-government student loan is ordinarily released by a discharge from bankruptcy.

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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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