When there are any kind of outstanding debts, including student loans, relief is provided under The Bankruptcy and Insolvency Act (BIA) by filing a Proposal or Consumer Proposal or claiming Bankruptcy.
What is not clear to some is that once you have been discharged from the Bankruptcy, or receive a Certificate of Full Performance, if your student loan debt was obtained by you less than seven years prior to the date of the Bankruptcy, Proposal or Consumer Proposal, you are responsible for paying the outstanding Federal or Provincial Student Loans.
So what happens if you do not have the income and/or resources to repay the student loans?
The Bankruptcy and Insolvency Act states the following:
- 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:
- 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
- Within seven years after the date on which the bankrupt ceased to be a full or part-time student; or
- Any debt for the interest owed in relation to an amount referred to in any of paragraphs (a) to (g.1) of the Act.
However, the court may order a non-application of this subsection of the Act, if:
- At any time after five years after the day on which a bankrupt individual who has a debt referred to in paragraph (1)(g) of the Act, ceases to be a full- or part-time student, as the case may be, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that:
- The bankrupt individual has acted in good faith in connection with the liabilities under the debt; and
- The bankrupt individual has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.
Section 178 of the Act provides that even if an applicant satisfies the court under subsections above, the court can use its discretion as to whether or not the relief being sought is granted.
Cases are based upon the individual’s personal circumstances, as well as the following factors which may be considered in determining whether or not the debtor has acted in good faith:
- Was the money used for the purpose loaned?
- Did the applicant complete the education or make an honest effort to do so?
- Did the applicant derive benefit from the education in the sense of gaining employment in the area directly related to the education?
- Did the applicant make reasonable efforts to pay the loan, or did the applicant make an immediate assignment into bankruptcy?
- Did the applicant take advantage of other options with respect to the loan such as interest relief or loan remission?
- Was the applicant extravagant or irresponsible with her/his finances?
- Did the applicant fairly disclose her circumstances on the application for the loan in the sense of acting with an honest intention? (Re Minto(1999) (Re Dustow (1999)
The Courts will look at how debtors used their student loan money, their efforts to complete their educational program, their efforts to repay the loans and their use of available repayment assistance programs, such as the federal governments Repayment Assistance Plan, which is available to borrowers who are having difficulty paying back their student loan debt.
The relief offered under section 178 of the Act must be considered in the context of the BIA as a whole such that honest but unfortunate debtors are entitled to a fresh start.
At Crowe Soberman Inc., our knowledgeable team of Licensed Insolvency Trustees and Administrators will guide and assist you with the Court application, seeking relief from burdening student loans, setting you on the path to a fresh start.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.