Introduction
Government student loans are unique debts in that student borrowers are given credit by the government for the purposes of bettering themselves and becoming contributing members of the economy. Section 178(1) of the Bankruptcy and Insolvency Act represents debts and liabilities that are excluded from a discharge from bankruptcy and includes debts and liabilities from spousal and child support, liabilities obtained from false pretenses or fraudulent misrepresentation, and curiously, government student loans. Unlike GST and other tax debts, these crown debts are an exception to a discharge and will not be released by a discharge from bankruptcy, unless 7 years has elapsed from the date that the student ceased to be a full or part time student. The issue of when the 7 year commences is an issue with two different interpretations which operates from the date of the status of being a student or the date from the advance under the loan. That interpretation issue is currently before the Supreme Court of Canada with Izabela Piekut v. His Majesty the King in Right of Canada as Represented by the Minister of National Revenue and is expected to be heard sometime later in 2024 (in full disclosure, our firm is counsel for the appellant in that appeal).
Hardship Applications and Government Student Loans
Another unique feature for government student loans is that student borrowers can apply to court after 5 years of ceasing to be a full or part time student to have the government student loan be released and discharged along with the rest of their liabilities. However, a challenge exists with the test for student borrowers who seek to have their loans released in that the applicant must meet the three-step test to show that (i) the applicant acted in good faith in connect to the loan, (ii) that applicant has and (iii) will continue to experience hardship as a result of the loan. Even if those three factors are met, the court still has the discretion to deny the application. However, the court does not have jurisdiction to modify the loan, reduce or extinguish one or more of the loans. It is an all or nothing application – either the loan is released or it remains exempt from discharge.
Discouraging Opportunistic Bankruptcies and the Fresh Start
The rationale to impose a delay to a student borrower in automatically including government student loans in a bankruptcy and having them releases to avoid and discourage opportunistic bankruptcies – that student borrowers will immediately make a rush into bankruptcy to wipe out their student loans before embarking on lucrative employment. For many student borrowers, that is not a reality unless they are embarking on a career in medicine, dentistry or law. Even then, the reality is that a degree in law, or a liberal arts degree, is not any guarantee of a lucrative career. The profession of most student borrowers seeking to make a hardship application I encounter are teachers or social workers.
In A.M.O.G. (Trustee) v. Royal Bank of Canada, 2014 BCSC 2341 (CanLII), Master Baker sitting as a Registrar heard a discharge from bankruptcy where the Royal Bank of Canada opposed a discharge from bankruptcy from a lawyer with private student loans. In the course of argument, Master Baker noted that not all professional degrees are the same:
[39] A.G. made a telling point in reply to Mr. Shouldice’s arguments. Most of the cases that consider loans and professional degrees consider medical professionals (some are physicians, as in Sutherland, and some are, for example, chiropractors). I agree with her submission that physicians, in particular, are not really members of “the market economy”. They enter a profession that almost guarantees gainful employment. The profession of law does not enjoy such success or assurance, particularly since the economic trauma of 2008. She is a good example of that. She worked hard to get articles in the first place and then a position in private practise. I suspect that her experience in private practise, i.e. the limits to her billing ability and her termination in the face of her illness, is typical. If she cannot, somehow, secure a changed role with her current government employer I am pessimistic that she can continue practising law.
Section 178(1.1) - The Hardship Application and Mechanics
A mechanism exists for student borrowers who make a voluntary assignment into bankruptcy or make a consumer proposal to make a separate application to court under s 178(1.1) of the BIA, which provides the following statutory test:
(1.1) At any time after five years after the day on which a bankrupt who has a debt referred to in paragraph (1)(g) or (g.1) ceases to be a full- or part-time student or an eligible apprentice, 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.
However, these applications are out of reach for many student borrowers since those experiencing financial difficulties and continued hardship may be unable to overcome the procedural barriers to bring an application to court, or retain legal counsel to make those applications on their behalf. An applicant will need to make an application to court and prepare an affidavit, serve the student loan authorities, and organize their submissions and materials to court.
Failing to properly serve the parties or abide by the rules of civil procedure will result in these applications either being adjourned or never making their way to court. Many provinces include a guidebook on bringing your own application to court such as this one from the British Columbia Supreme Court. However, one of the other challenges is even how or where to serve the parties. For instance, its not clear how to serve the student loan authorities - is it from the address on the proof of claim or is it treated as if its an originating proceeding - and serve it in accordance with the applicable provincial Crown and Liability Act or Federal Crown Liability and Proceedings Act? Often the application materials will be served and no response will be provided by the student loan authorities, or there many be loans across several provinces or even financial institution guaranteed loans.
It would be helpful to streamline the address for service for these applications and that the provincial or federal crown provides some sort of position on the application.
Determining Financial Difficulty
Aside from procedural hurdles, there remains the question of what is sufficient financial difficulty for the purposes of s 178(1.1). The court has applied or taken into account the following factors when determining financial difficult:
1. The court may apply its own assessment on a case-by-case basis of “what is going out and where (Theriault (Re), 2019 NSSC 300 at para 20)
2. Applying Directive 11R2 and whether or not the applicant has surplus income (or not)
3. Applying the Loan Repayment Estimator or Calculator
Even if a student borrower is experiencing financial difficulty now, the remaining challenge is the continued financial difficulty, which the cases have found that the financial difficulty will be met if it takes 10 or more years to repay the loan. This may be demonstrated with medical evidence or medical issues that would prevent a student borrower from achieving their potential, the diminishment of their “capital asset” in that it can no longer be monetized, or after a sufficient period of time has passed and a student borrower has maximized their earning potential.
Closing
In closing, student loan hardship applicants are a challenge for student borrowers to achieve due to the circular nature of hardship – those with medical conditions, experiencing poverty and financial difficulties are least likely to be able to access the courts to apply for a hardship application.
Cody Reedman is a lawyer at Reedman Law. He is an experienced in bankruptcy and insolvency matters, and is experienced in student loan and insolvency matters along with complex consumer bankruptcy matters. For those interested in our student loan hardship program, we offer fixed fees and limited scope retainers for student borrowers looking to apply for a hardship application: https://www.reedmanlaw.com/practice-areas/student-loans-and-financial-hardship This post expresses his personal views and nothing should be construed relied upon or taken to be legal advice. Please consult a licensed lawyer in your jurisdiction
