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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

We are pleased to announce that Grace Lindsey, a graduate of the UBC Peter A. Allard School of Law, will be joining our firm as an articled student starting in August 2023. She previously volunteered with the Law Students’ Legal Advice Program (LSLAP) to provide pro-bono legal services to low-income individuals. We are pleased to welcome her as our firm's third articled student at Reedman Law, and are excited to have Grace join our team.

*By Ryan Sissons (summer articled student) Being terminated or losing your job is undoubtedly a challenging experience, and this difficulty is further exacerbated when the company is insolvent. Directing an insolvent company also gives rise to numerous concerns. Therefore, it is essential to understand that a company's bankruptcy or receivership does not automatically absolve it of its obligations to its employees. Employee Wage Protections Under the Bankruptcy and Insolvency Act Pursuant to section 81.3 of the Bankruptcy and Insolvency Act (BIA) for bankruptcies and section 81.4 for receiverships, employees are entitled to a super priority security claim for up to $2000 of unpaid wages, limited to commissions or compensation owed in the six months preceding the company's assignment into bankruptcy. Remarkably, this super priority claim takes precedence even over secured creditors. In other words, if the company possesses only secured assets and no other resources, the employees will be paid from these secured assets before the secured creditors receive any payment. However, claims that fall under sections 81.1, 81.2, and 67(3) of the BIA supersede the $2000 in unpaid wages. Section 81.3(9) clarifies the application of this section as applicable to vacation pay accrued within the six months but excludes severance or termination pay from its scope. Directors are also excluded from this section. All unpaid wages beyond the $2,000 limit and any debts owed for severance or termination will become unsecured claims against the company. As unsecured claims, they will be treated like regular claims, receiving payment in proportion to the company's overall debt owed. One should also be aware of the Wage Earner Protection Program Act (S.C. 2005, c. 47, s. 1), which may provide support for employees that allows them to avoid pursuing their own claims. As discussed in Ted Leroy Trucking Ltd. v. Century Services Inc. (2010) the government will pay a limited amount to the employee and then subrogate the employee’s priority and non-priority claims. Directors’ Liability Section 119 of the Canada Business Corporations Act (CBCA) provides employees with a potential claim for wages against the company's director(s). The specific wording of this section states directors are liable for "...debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.” While this clearly includes unpaid wages for work already performed, the phrasing has led to confusion regarding whether vacation, severance, and termination pay are covered by this section, as it specifically refers to "services performed." In the case of Barrette v. Crabtree Estate, [1993] 1 S.C.R. 1027, it was established that termination and severance pay constitute debts owed to employees, but not for services performed. Rather, they are considered damages for breach of contract, which differs from debts for services performed. Consequently, if an employee is terminated before or due to the bankruptcy, the director cannot be held liable for severance or termination pay. This principle was restated more recently in Redcorp Ventures Ltd. (Re) 2010 BCSC 208. There are some exceptions to this principle, as per the Quebec Court of Appeal in Schwartz v. Scott (1985). If there is an agreement stipulating payment upon termination or resignation, based on the individual's time spent at the company, then the directors may be liable. Additionally, provincial legislation may impose liabilities, as demonstrated in Meyers v. Walters Cycle Co. (1990), 85 Sask. R. 222. A debate surrounds the inclusion of vacation pay under directors' liability. In the case of Vopni v. Groenewald, Justice McKeown ruled that vacation pay lies outside the scope of directors' liability when the director resigns before the bankruptcy, or the receiver terminates employment. However, the Manitoba Court of Appeal in Brown v. Shearer ruled that a director would be liable for vacation pay accrued during any period in which they were still a director within the six months preceding the bankruptcy. This means that if the director resigned two months before the company went into bankruptcy, they would only be liable for vacation pay accrued in the 4 months before they resigned. Conclusion In conclusion, it is evident that termination pay, and severance are not eligible for a super priority claim under the BIA and are likely exempt from directors' liability to employees under CBCA. Directors may still be held accountable for vacation pay, but only for the duration of their directorship. These aspects are of utmost importance for employees who were formerly associated with a now bankrupt company and for directors of insolvent companies. Understanding these legal nuances is essential to navigate the complexities of unpaid wages during financially challenging times. As employees, it is crucial to be aware of your rights and protections, while directors must be mindful of their potential liabilities in such situations. This post is not legal advice and is limited to explaining debts regarding wages when a company goes bankrupt. It does not address benefits, or other possible liabilities. Legislation and Cases Cited Bankruptcy and Insolvency Act (R.S.C., 1985, c. B-3), https://canlii.ca/t/7vcz. Wage Earner Protection Program Act (S.C. 2005, c. 47, s. 1) Ted Leroy Trucking Ltd. v. Century Services Inc., 2010 BCCA 223 (CanLII), https://canlii.ca/t/29lf5 Canada Business Corporations Act (R.S.C., 1985, c. C-44), https://canlii.ca/t/7vf1. Barrette v. Crabtree Estate, 1993 1 SCR 1027, https://canlii.ca/t/1fs3h. Redcorp Ventures Ltd. (Re), 2010 BCSC 208, https://canlii.ca/t/2855x. Schwartz c. Scott, [1985] J.Q. no. 41,1985] CA 713, JE 85-1063, 32 BLR 1 p, 35 ACWS (2d) 406, EYB 1985-143664. Meyers v. Walters Cycle Co., 1990 CanLII 7816 (SK CA), https://canlii.ca/t/g9l7j. Vopni v. Groenewald, 1991 CanLII 8340 (ON SC), https://canlii.ca/t/g9j1p. Brown v. Shearer, 1995 CanLII 6258 (MB CA), https://canlii.ca/t/1pfkf.

By Finn Merritt-Neill Anyone who has been through a divorce understands that it is complicated, both emotionally and legally. What most people don’t know is that a bankruptcy has the potential to complicate further, or even compromise, their position in family law proceedings. Lawyers should be aware of the interaction between the Family Law Act and the Bankruptcy and Insolvency Act and take steps to mitigate those risks. The case of Kirschner v. Moore is a perfect example. In Kirschner the claimant assigned into bankruptcy mere months before commencing her family law action. What should have been a relatively straightforward division of family property case became a multi-year ordeal in which the claimant nearly had her claim dismissed for not having the legal capacity to commence her action in the first place. As a result of assigning into bankruptcy, bankrupts vest all their assets and liabilities in their Licensed Insolvency Trustee pursuant to section 71 of the Bankruptcy and Insolvency Act. Lawyers naturally understand that this includes real and personal property, as well as cash and any other property. Section 71 of the BIA is so broad that it also captures causes of action which are considered assets in a bankruptcy. And yes, that includes causes of action arising under the Family Law Act. The right of a claimant to sue their former spouse thus vests in their Trustee. Family law claims must then either be commenced by the Trustee, or the claimant must make an application under section 38 of the BIA to have their cause of action assigned back to them. If a claimant commences a family law action without having their cause of action assigned back to them, they do so without standing. The claimant in Kirschner spent more than five years in litigation all because she commenced a family law action without having the legal standing to do so. Family lawyers can take easy steps to protect their clients’ rights by conducting a search of the Office of the Superintendent of Bankruptcy database to determine if their client (or the other side) is an undischarged bankrupt. Court Services Online may also have records of the bankruptcy proceedings, presuming that the Trustee has filed their statutory forms with the court, although this does not happen where bankrupts receive an automatic discharge. Bankruptcy lawyers should also be aware of the potential for family law proceedings to interfere with their clients’ rights and interests. It does not always occur to the bankrupt to disclose a former spouse’s assets and liabilities to their Trustee. Nevertheless, such assets or liabilities may legally form a part of the bankrupt’s estate. Discovery of such assets or liabilities may lead to the bankrupt losing their opportunity for an automatic discharge, or worse, having their discharge rescinded. Bankruptcy and family lawyers alike should be alive to the fact that the BIA and the FLA don’t always get along.

In today's post, we'll be focusing on surplus income and Directive 11R2. This policy holds significant relevance for consumer debtors as it directly impacts bankruptcy proceedings in Canada. Most crucially, it determines the amount a debtor will need to contribute to their bankruptcy. To phrase it differently, the creditors bear the brunt of the loss due to the bankruptcy, and the bankrupt party is also expected to tighten their financial belts if they have the capacity to do so. First, let's unpack the term "Directive 11R2". Also known as the Surplus Income Directive, plays a pivotal role in Canadian bankruptcy proceedings. In the context of bankruptcy, 'surplus income' refers to the income that goes beyond what a bankrupt individual or family requires to maintain a reasonable standard of living, as defined by the Office of the Superintendent of Bankruptcy ("OSB") and found in s. 68 of the Bankruptcy and Insolvency Act. It is annually by the OSB updated to align with Statistics Canada’s Low Income Cutoffs (LICO). If a debtor's income surpasses these thresholds, they are obliged to contribute a portion of it towards their debts during the term of their bankruptcy. While this term is limited to the initial 21 months for first-time bankrupts, or 36 months for second-time bankrupts, the court has the discretion to order that surplus income payments continue beyond the original bankruptcy term. Directive 11R2 could substantially affect the bankruptcy timeline and the payments a bankrupt is mandated to make. Its application also determines how much a bankrupt have to contribute surplus income towards their estate and for how long. But what if you dispute the Trustee’s Calculations? Sometimes, a bankrupt individual and the Trustee may disagree on the calculation of surplus income. In my view, these disputes generally fall into two categories: 1) disputes regarding the accuracy of the surplus income calculations; or 2) inability or refusal to pay. To address disputes related to surplus income, a few steps can be taken: If the bankrupt party disputes the Trustee’s calculation and surplus income is the only unresolved issue obligation, the Trustee and the bankrupt may decide to engage in mediation to resolve the issue; Alternatively, both parties can take the matter to court. The bankrupt party may present an alternative calculation to the court at the discharge hearing – this should be substantiated by their calculation with affidavit evidence. While the court will give consideration to the Trustee's calculation (see (Re) Cornell, 2021 ONSC 7427 at para 28), it reserves the right to review the calculations at the hearing. If the bankrupt agrees that the surplus income calculation is accurate but simply cannot or refuses to pay, they may request the court to review their circumstances when deciding on terms of discharge, or request that the Trustee to consider the bankrupt's "personal and familial situation". The bankrupt party may request the court to take into account their unique circumstances and plead for a reduction or waiver of surplus income due to inability to pay or financial hardship. Considering the broad discretion exercised by a Registrar in Bankruptcy at a discharge hearing, this could be a possible recourse. It is also possible the Registrar in bankruptcy will not reduce the surplus income obligations and uphold the Trustee's calculations. The Bottom Line: Bankruptcy is a multifaceted process with several key components. Understanding significant pieces of legislation, government directives such as Directive 11R2, and the discretion of the Trustee and Court can greatly influence how you navigate it. Hiring an experienced insolvency lawyer can assist with both letting the bankrupt know where they stand and representing them at the discharge hearing to seek a reduction if the circumstances warrant it - or if a dispute with the Trustee arises.

Welcome to our new website. - Cody Reedman