Q & A: Student Loans and Bankruptcy (Complex Cases)

by Jeannine Mitchell

For this Q + A, Debt 101 Publisher Jeannine Mitchell consulted Douglas Hoyes, an Ontario-based bankruptcy trustee known for his interest in student loan bankruptcy policies. 

Douglas Hoyes (BA, CA, CIRP, CBV,Trustee) is co-founder, Hoyes, Michalos & Associates Inc. 

Tip: To understand everything in this article, first read: Q & A: Student Loans and Bankruptcy (Basic).

 ADDING STUDENT LOANS TO AN EARLIER BANKRUPTCY

Debt 101: Douglas Hoyes, you’ve probably had clients who went bankrupt in the past but their student loans did not qualify for discharge at that time. And this could have been under the previous 10-year waiting period since school, or the current period of 7 years (or 5 years with hardship).

Some people tell us that when they faced this situation, their bankruptcy trustees said that whenever their student loans reached the required waiting period, they could apply to have those student loans ‘set aside.’

Do you have any comment? What would you advise someone whose student loans didn’t qualify during their earlier bankruptcy but are now ‘old enough’ for discharge?

Douglas Hoyes: Yes, it’s possible to go back and have them discharged. For example, if a person goes bankrupt when their student loans are 4 years old, they could make an application to court once their student loans reach 5 or 7 or more years and ask the court to discharge them.

However, it’s entirely up to the court whether or not they will, and again the student would need to demonstrate “hardship”.

Debt 101: Let’s discuss some of the practical issues for people who must add student loans to an earlier bankruptcy because those loans were not ‘old enough’ to discharge at the time.

Let’s start with costs. Suppose their bankruptcy is over, they’re also more than 7 years out of school, so their student loans are now eligible for bankruptcy. What might it cost to make that new application through an experienced bankruptcy trustee?

Douglas Hoyes: The answer varies, but a lawyer in Toronto would charge anywhere from $1,500 to $3,000 to bring the application to court. It generally wouldn’t be the trustee making the application since, by that point, the trustee is discharged.

However, trustees could do it, and could charge whatever they thought was reasonable, which might be in the same ballpark as what a lawyer would charge. The applicant could also go to bankruptcy court and attempt it themselves.

Debt 101: That brings us to representation. It’s good that you’ve pointed out the option people have to represent themselves. I’m also wondering about the role of a bankruptcy trustee compared to a bankruptcy lawyer.

Let’s say Jonathan went through a general bankruptcy with a trustee when it was still too early to discharge his student loans. Say he’s still in financial trouble, and the loans are now eligible for discharge. Why wouldn’t he call on the same trustee – assuming he was happy with the trustee’s service? He knows that trustee, and the trustee knows his case.

You’re a bankruptcy trustee yourself. But, speaking objectively, can you say why Jonathan might now consider a bankruptcy lawyer instead of his satisfactory bankruptcy trustee?

Douglas Hoyes: The short answer is that as the trustee, I have already been discharged, so there's no reason for me to go to court to make the application. I certainly could do it, but in my experience it's dangerous for trustees to play the part of lawyers.

Since it's a court application, with the motion materials and everything else required, it's generally best left to a lawyer. If I was going to do it I'd probably charge $2,000 for the time and effort involved, which is probably what a lawyer would charge, so on that basis it's better to have a lawyer do it. In Toronto there are a number of them who make these applications all the time, so they’re actually better at it than I would be.

Debt 101: Let’s end this section by looking at 'timing' your bankruptcy.

When we asked about the costs of discharging student loans that weren’t eligible during an earlier bankruptcy, your answer suggested costs about the same as the first bankruptcy. Sounds as if there’s no financial break from 'adding on' and it’s treated as two separate bankruptcies.

In that case, shouldn’t people in financial trouble try to hang on for a full 7 years after school before they seek bankruptcy? It even seems risky to try for that 5-year hardship provision since – if that fails and their poverty continues – they'll need to pay the same costs again with another bankruptcy once they’ve been out of school for 7 years. Any thoughts?

Douglas Hoyes: About waiting, yes, you’re correct, if you have student loans, there generally not much point in going bankrupt in year #3. I agree that you would be better to hang on until year #5, or even better, year #7, and then your loans should be automatically discharged. You would only go bankrupt earlier if you had an overwhelming amount of other debt.

To clarify, there are two possible scenarios:

Let's assume Jane leaves school in 2000, and due to financial difficulties, she goes bankrupt in 2004:

Scenario #1: If she goes bankrupt in 2004, her student loans are not
discharged. She could, after being discharged, go to bankruptcy court
and make an application to have the loans discharged, but she would have to wait until either 2005 or 2007.

Scenario #2: She could simply file a second bankruptcy in 2008. Her
student loans, which weren't discharged in the first bankruptcy, are now
8 years old, so unless a creditor objects, they will be automatically
discharged. She will have to decide if it's cheaper to go bankrupt a
second time (based on her income and other assets), or if it's cheaper
to hire a lawyer and apply to court to have the loans discharged.

 BANKRUPTCY IF YOU’VE RETURNED TO SCHOOL

Debt 101: People get confused by the ‘waiting period’ for discharging government student loans in bankruptcy. Often, professionals tell them their student loans must be “seven years old.” Yet government officials tell us that it isn’t about the age of the loans, but how long you’ve been out of school – with or without a loan.

They explain that no matter how old your loans are, you must wait an extra 7 years if you’ve gone back for even one post-secondary course. Or an extra 5 years if you pass requirements for a hardship discharge.

This could lead to an extremely long wait. Sometimes people are in financial trouble, unable to find the work they trained for. Yet - because they went back to school at some point – they’re now told they face further years of waiting, even though their student loans are now 10 or 20 years old.

Unless, that is, they take a chance and hope for a legal decision that takes a less strict interpretation of the ‘waiting period’ in Canada’s Bankruptcy and Insolvency Act.

So here’s our question: Do bankruptcy courts  agree with government officials that the Act requires your ‘clock’ to start again if you go back to school, even if you go back without a new loan? How are courts really interpreting this waiting period rule?

Douglas Hoyes: A strict interpretation of the rules states that student loans are discharged if it’s seven years since you ceased to be a student. If you return to school, you are still a student. So it’s not seven years, so returning to school can restart the clock.

However, there are court cases that state that returning to school after a prolonged absence does not restart the clock.

Here’s my advice to debtors: A case from Saskatchewan [such as the Hildebrand case below] is not necessarily binding on a Registrar in another province. So there is no guarantee that returning to school does not restart the clock, so be forewarned.

Debt 101: Forewarned, yes. Applicants who get dismissed due to strict legal interpretations would face the cost of further bankruptcy applications later on.

Douglas Hoyes: Here is the summary of a recent case where older debt was discharged, but the 5-year hardship test for recent debt was not met: Hildebrand, Re, 2010 SKQB 321, 71 C.B.R. (5th) 73, 360 Sask. R. 128

— Bankrupt [person filing for bankruptcy] took out loans from three Student Loan Creditors to pursue various courses of study at various educational institutions between 1994 and 2002
— Bankrupt filed to assign into bankruptcy on May 23, 2008
— Bankrupt received automatic discharge on February 24, 2009
— Bankrupt brought application for declaration as to which, if any, of his student loans were released upon his discharge from bankruptcy; and an order pursuant to s. 178(1.1) of Bankruptcy and Insolvency Act that s. 178(1) did not apply to student debts which survived bankruptcy
— Application granted in part
— Student loan debts incurred with respect to programs of study that ceased more than seven years prior to May 23, 2008 were released upon bankrupt's discharge from bankruptcy
— Student loan debt incurred with respect to academic program that ended in 2002 (final program) was not released because the bankrupt had assigned bankruptcy less than seven years from ceasing to be a student relative to that debt.
— For purposes of hardship application under s. 178(1.1), only bankrupt's student loan debt incurred with respect to final program would be considered
— Bankrupt did not meet hardship test, so application for hardship relief was dismissed.

Debt 101: So in the Hildebrand case above, the older student debt seem to have been discharged based on loan dates, not by the last time at school. In other words, this does not use a strict interpretation of the Act. So the reason the most recent student loan was not discharged was because the 7-year waiting period had not yet passed and the applicant didn’t meet hardship requirements for a 5-year discharge.

Douglas Hoyes: Correct, the Hildebrand judgement did not tie earlier loans to the most recent period of schooling.

Here’s the summary of another case that didn’t treat the loans collectively under the Act: McNutt, Re, 2008 NSSC 166, 44 C.B.R. (5th) 24, 851 A.P.R. 180, 266 N.S.R. (2d) 180

- Husband and wife's post-secondary education was funded through federal and provincial student loans
— Husband joined armed forces and received income while wife remained at home to attend to their three young children, two of whom required special care
— Husband and wife filed joint consumer proposal and received certificates of full performance
— Husband and wife brought application for order relieving them of student loans under s. 178(1.1) of Bankruptcy and Insolvency Act ("Act")
— Application granted in part
— Parties acted in good faith respecting loans, their past income was limited, their loans substantial, and family responsibilities were demanding
— Parties will continue to have financial difficulty and unable to pay loans
— Wife met requirements of s. 178(1.1)
— Husband completed his studies more than ten years ago but his subsequent out-of-province studies were terminated when school went out of business
— Husband ceased to be student less than ten years ago and incurred another single loan under provincial Act of another province
— Section 178(1.1) spoke of "loan" in singular, and no suggestion existed that all outstanding loans should be dealt with collectively
— Language of Act does not demand that time start to run again for earlier loans when one later takes up studies relying on fresh government loan or loan under another jurisdiction
— Loans under federal and provincial legislation related to husband's studies which ceased over ten years ago
— Husband entitled to relief
— Application to be kept open so that he could apply for relief from other provincial legislation once ten-year period respecting it expired.

Debt 101: It’s interesting that the judgement in this McNutt case, which was heard in Nova Scotia Supreme Court, states that the language of the Act does not require that the clock be re-started for earlier student loans. That’s a very important point. Even though the Act is fuzzy in its wording, it doesn’t explicitly state that older loans should be tied to new ones.

I hope people won't find it confusing that this 2008 case also talks about waiting “ten years.” At the time of this case, Canadians had to wait 10 years after school -- not the current 7 years (or 5 years with hardship).

Douglas Hoyes: Yes, that’s correct. People may also want to read this article by Ian Martin, at our company: What Can I Do if I Can't Pay My Student Loan?  

Debt 101: You've got many other articles on your bankruptcy blog, which we've had linked from this site for years. However, Ian Martin's piece above is a good fit here because it also talks about discharging student loans after an earlier bankruptcy. Thank you, Doug!