144 – Bankruptcy and Student Loan Debt

Wayne Kay 00:04
Bankruptcy and student loan debts. That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay and coming up, we’re going to talk about, you know, the seven year rule. What is that? I’ve heard a lot about it. We’re going to talk about if it applies universally in all provinces? Is there a five year rule that you also hear about?

We’re going to talk about that and a lot more, including student loans, all coming up. My guest today, Francyne Myers from Allan Marshall & Associates from Nova Scotia in the Halifax and Truro offices. Francyne, thanks for being on the show.

Francyne Myers 00:46
Oh, thanks for having me, Wayne.

Wayne Kay 00:47
Well, a big topic today, Bankruptcy and student loan debt. Now, I don’t know where I heard this. Once upon a time, I thought student loan debt wasn’t even possible to get rid of.

Francyne Myers 00:58
Oh, it’s always been possible to get rid of. Years and years and years ago, though, all government debt had a much higher ranking in a Bankruptcy, so they just got paid out first. And then the government went through all these kinds of strange ideas about how long student loans need to be out.

There’s one time it was ten years and it kept flipping around, so there was a lot of confusion about it. We’ve had these rules now for quite a few years. So there’s more certainty.

Wayne Kay 01:31
Is there more of a student debt problem in America? I wonder if that’s where I’ve heard about this.

Francyne Myers 01:37
Oh, you know what? That could very well be right.

Wayne Kay 01:42
Sometimes that bleeds over and we think what we’re hearing down from our friends in the United States – but the rules are completely different between our countries and debt.

Francyne Myers 01:52
They are, although the lines are blurring, I will give you that. But for the time being, they are still fairly different when it comes to student loans anyway.

Wayne Kay 02:01
Okay, so there’s different things like a seven year rule. Explain why you hear about a seven year rule so much.

Francyne Myers 02:09
Oh, okay. That’s the big one that we always have to keep in mind when people come to us and they actually have student loans.

So keep in mind, it’s only applicable, though, to folks who have financed their education under either Canada Student Loans act, the Candidates Student Financial Assistance act.

Or provincial student loans, or also the Apprenticeship Loans act. We don’t hear those as much, but we do have people who have loans under that. So those all fall under the seven year olds. What it does not apply to is people who finance their education with bank student lines of credit.

So if you got a student line of credit from Royal bank, that is just a regular debt in a Bankruptcy, the seven year rule does not apply.

So here’s what the rule actually says.

If you file for Bankruptcy at least seven years after the date you stop being either a part time or full time student or an eligible apprentice. When you receive your release or your discharge from your Bankruptcy, your obligation to repay your student loan will also be discharged or released along with your other, what we call unsecured debts.

And the day you stop being a part time student or full time student It’s all the same thing.

And it’s not set by the Bankruptcy and Insolvency Act or the Trustee. It’s set by the student loan people.

So when you come to me as a Licensed Insolvency Trustee with a student loan as one of your debts, I will always ask you to call the student loan center to confirm your period study end date. And it doesn’t matter if you told me 15 years ago.

I always do this because sometimes the date that you think is this period, study end date is not always the same date that the student loan center has on file. And can you imagine how disappointing it would be for you to be a week short of that date when you filed a Bankruptcy because you were sure that the seven years expired when you wrote your last exam or had your last class, only to find out the student loan center’s calculation of that date is, like, three weeks later.

Wayne Kay 04:28
Oh, wow. That would be devastating.

Francyne Myers 04:30
I’ve had people who, luckily it’s never happened to me because I’m always like, I’m not filing this till you call to make sure. I’ve had people wait and call. They’re in, they’re about to sign. I’m like, you need to call student loan so that I’m sure that this is the right time for you to file. Sometimes we’ve had to put off the filing because of that.

Wayne Kay 04:53
Is this right across the country, by the way? It sounds like it is, yes.

Francyne Myers 04:57
Yes. Because it is the federal legislation. Now I’m going to talk about another little nuance. That’s a really good question.

Let’s talk about if you haven’t been out of school, right. Or completed your apprenticeship for at least seven years.

I’ve had people say to me, well, my loan isn’t seven years or I haven’t been out of school. People say isn’t seven years old yet. So I don’t need to put it on my list of creditors. You do.

It’s still listed as a debt along with all your other debts. And the student loan people, whether it’s federal or provincial. They’ll lend you the money, and will still receive money from the Bankruptcy, just like other creditors. So you have to list them.

But unlike the other creditors whose debt obligations get released, your obligation for your student loan will not be released. So, you know, I say to people, you might as well, if you want to, you can keep making payments on your student loan if it’s not released, because you’re still going to have to pay it anyway.

So you may as well just list it. Or you have to list it, but may as well just start making payments if you like. You don’t have to.

But if it’s part of your plan to be out of debt, well, it might be a good idea to keep working on it as well.

And you just ask, is it universal in all provinces? All right, so yes and no.

It’s federal legislation. So you would think. But here’s the problem. To add an extra layer of complication to everything, some provincial courts, including BC, Wayne, have ruled that even if you did not borrow money to go back to school, as soon as you go back to school, even if you’re taking one course, the seven years resets.

So this is referred to as this single date approach. So let’s kind of break that down. I go to school, I take basket weaving eight years ago.

And then three years after that, I decide to take window painting, but I only take one course.

And I don’t need a loan for that because it’s just a short course, and I’m. While I have just reset my seven year date.

Wayne Kay 07:23
Think about the people that don’t know this. Wow.

Francyne Myers 07:25
Well, that’s why you need to, you know. Other courts have ruled that it’s only the school related, the schooling related to when you took the loan out. That’s called the multiple date approach. And this happens because the courts in the provinces are the ones that interpret the federal legislation. Different provinces apply different rules.

So it is very important to know how the courts in your province have ruled on this question. Well, any Bankruptcy matter, because they can rule differently on any Bankruptcy matter across the country.

So we have a patchwork of decisions. Unless the Supreme Court of Canada rules on it all over the place.

It’s also very important to always check, as I harp on the period, study end date with the student loan center. Go right to the source. Got to find out exactly what the numbers are.

Wayne Kay
Now, is there like a five year plan or something that I’ve heard of as well? A five year rule?

Francyne Myers 08:33
Oh, yes, yes. Now this is not as common because we always say if you’ve been out of school seven years, of course. And then they call and get their study end date, we make sure that you wouldn’t be filing before because it would be a great disappointment, obviously.

Let’s talk about the five year old. There are two. This confuses people. So are there two rules? Yes and no.

Don’t you love these weasel answers I give you? Okay, so what it really is all the more important to come talk to a Trustee.

It’s really a five year court application rule. Not as many people are familiar with this rule.

So what I’m going to say as well, Wayne, I have looked up to see how this is explained on a number of sites. It’s not explained properly.

Francyne Myers 09:21
This rule is of use to people who have not been out of school for more than seven years when they filed a Bankruptcy. And I’ll give you an example after I can explain the rule because I think it helps to get your head around it.

Francyne Myers 09:36
What this rule says is that after you file for Bankruptcy, you can make an application to the Bankruptcy court, which is provincial. Bankruptcy, insolvency court, to have your student loan released, forgiven, discharged, whatever you want to call it, once you’ve been out of school for five years.

But you have to prove a couple things. You have to prove that you try to repay, pay your loan.

Good faith is one test. And you also have to prove to the court that repaying the loan will result or will continue to result and continue to result in undue hardship for you.

So let’s break that down. Let’s give you an example.

Okay, so we have Mary. God bless Mary. Mary filed a Bankruptcy this year, but she only left school three years ago. So the student loan wouldn’t fall under the seven year rule.

Francyne Myers 10:37
But in two years, or once she was out of school for five years, three plus two. I apologize for that. Stellar math. I did that in my head.

Mary could make a court application to the provincial Bankruptcy and Insolvency court and ask the Bankruptcy and Insolvency court to order that the student loan be released in the Bankruptcy.

And people are like, oh, I don’t want to go to court, but most courts that I know, I practice in Nova Scotia. Our court is very good. They put together a package that we send out to people, which gives you step by step on how to do this.

Wayne Kay 11:15
This is the importance of dealing with the Trustee, obviously, because you’re going to walk us step by step through this situation.

Francyne Myers 11:23
Yes. And we always talk to people and I just kind of mentioned, okay, so it’s not the same. So in a Bankruptcy, you’ve got the period, study, end date more than seven years ago. You get your discharge. That means your debt is discharged as well.

Wayne Kay 11:38
Right.

Francyne Myers 11:38
In this case, you’ve got to prove to the court two things.

Good faith and hardship. So let’s talk about that.

Wayne Kay 11:47
Like an explanation of what that means exactly.

Francyne Myers 11:50
I will absolutely understand why you want to know that. Okay. So here’s exactly what the legislation says. You acted in good faith in connection with your obligation to repay your student loan, and you have experienced and will continue to experience financial difficulty that will prevent you from paying these debts. You got to prove both things.

So here’s what the courts look like for good faith.

Francyne Myers 12:14

I’ll tell you what. If you never made a payment on your student loan and all the repayments were holding your tax return or this or that, that’s not good faith. The courts would look at how the debtors use the student loan money. So, you know, if you want, we’ll give an example.

Wayne Kay 12:36
All right.

Francyne Myers 12:37
So here’s what the courts look at. Okay, how you use the student loan money, your efforts to repay the debt. If you try to use the repayment assistance program, which is really good for students having difficulty paying back their student loan, right? Now, if you used your loan to head to Jamaica on spring break, it’s probably not good faith.

Wayne Kay 13:03
I would think so, yes. Okay.

Francyne Myers 13:05
It has to do with repaying, whether you can’t do it or you’re not able to put food on the table. If you’re days away from a six figure dream job, don’t expect the court to be sympathetic in order your student loan be discharged.

So you have to show student loans. They’re asking for $500.

I’m just going to pick that out there, $500 payments, and you just can’t do that. Now, here’s the thing that the court struggles with. When you read the wording of the law, the court can’t say, oh, well, let’s wipe out half your loan because you could pay. So, for example, let’s say you have a $40,000 student loan, which is not, I’ve heard of.

And the payments related to that debt are causing you real financial hardship. But you know what? If your loan was only $20,000, you could make those payments. Court can’t do that.

And I’ve heard our register say, it’s really too bad I can’t do that because some students would find that much easier and they could handle it. But it’s an all or nothing order. So the court can’t order that part of the loan be discharged. So sometimes the court may be reluctant to order that the loan be released if your, you know, we call it evidence as to good faith or hardships is a little shaky.

Wayne Kay 14:39
Now that makes perfect sense. But now I know of people who are going back to school in their forties and even fifties. If they need a student loan after they’ve gone through this hardship and they’ve had a Bankruptcy that’s been dealt with, are there any options for them?

Francyne Myers 14:57
You know what? That’s a really good question. I get that question a lot. People will say, I intend to roll in September. What happens? So if you do intend to enroll in school but you have a Bankruptcy in your past, this is what we’ve kind of seen.

It’s always up to student loans whether they’ll give you a loan. So you have to check with them. But if you got rid of a student loan or discharged from a student loan, you might find it a little more difficult to obtain a loan or qualify for financial assistance in the future. I always tell people, before you file a Bankruptcy, talk to student loans and see what their policy is. Because here’s what happens.

Policies change. And what might have been the case with your cousin Alvin in 2018 may not be the case for you in 2024. So you don’t want nasty surprises after you start Bankruptcy and you’re planning to further your student loan financing in the next September.

If you filed a Bankruptcy and you didn’t discharge the student loan, we’ve heard from people that it’s easier to get financed by student loan, which kind of stands to reason. But always, always check with student loan people before you make a decision on that for sure.

Wayne Kay 16:08
Wow. That’s a lot of great information that you’ve shared regarding these student loans. And I’m sure a lot of Canadians have been pondering what to do with a bad situation they may be in financially.

Francyne Myers 16:19
Yes, they certainly have. Wayne.

Wayne Kay 16:20
Terrific. Well, thanks again for being on the show. It’s always a pleasure having you here.

Francyne Myers 16:25
All right, thanks, Wayne. Was a pleasure as well.

Wayne Kay 16:27
My guest today, Francyne Myers. You can learn more or schedule that free consultation with Allan Marshall & Associates Licensed Insolvency Trustee through their website wecanhelp.ca and they help a lot of people. And that’s it for another edition of the Debt Matters podcast.

Thanks for listening. And you can always subscribe wherever you get your favorite podcast from. And for more information, please check out debtmatters.ca.