Listen to the podcast Student Loan Forgiveness and Bankruptcy Law
Doug H: Welcome to Debt Free in 30, where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I'm Doug Hoyes.
Today we're going to talk about student loans and specifically what happens to student loans if you go bankrupt and how you can use the court process to discharge student loans.
First some background, and this is important if you're a student or if you are a parent or grandparent of a college or university student with student loans. Under current law if you go bankrupt, a government guaranteed student loan is only automatically discharged if you have ceased to be a student for at least seven years at the time of your bankruptcy. So, if you got a student loan in 2010 and graduated in 2014 and go bankrupt in 2015, you're student loan does not automatically go away because you have not been out of school for more than seven years. It doesn’t matter when you get the loan, all that matter is when you cease to be a student. The only exception is the hardship rule that says if five years has gone by, you can go to court and ask the court to wipe out all or part of your student loan as a result of the bankruptcy, as well. To do that you need to go to court and court generally means you hire a lawyer to represent you.
So, how does that work, what's the process? To find out I'm joined today by a lawyer who has appeared in court many times on student loan related matters. So, let's get started. Who are you? Where do you work? And what kind of lawyer are you?
Doug H: Great, well thanks for being here today Dan. I appreciate that and yes we are recording this here in Kitchener-Waterloo. You have appeared here in court in Kitchener, but also in Toronto and London as well, is that correct?
Dan V: That's correct.
Doug H: So, you've got a pretty good understanding of how the court system works with respect to this in the Ontario area.
I want to state at the start that we are not giving legal advice on this show because every person's situation is different. We're giving general advice on how the law is generally applied. But if you're listening to this and thinking boy I need some help with that, then you should speak to a lawyer. In the show notes we will put links to Dan, his website, how to contact him if you want to get in touch with him directly our website address is hoyes.com, that's h-o-y-e-s.com, and if you just do a search for podcasts or student loans you'll be able to find us.
So, let's start with what may seem like an obvious question. I said in the introduction that if you go bankrupt or file a consumer proposal, a student loan is only automatically discharged if you've been out of school for seven years or more. What does seven years mean?
Dan V: Seven years from the ceasing to be a full-time or part-time student seems like an easy question.
Doug H: Yeah I mean my last exam was on May the 10th, so I count seven years from May the 10th and that's seven years. What's so hard about that?
Dan V: That's not how the law works. And in fact, depending on the province you're in, the Federal law obviously works through Canada, but depending on the province you're in, the last date of study is a term of art in terms of the legislation. So, typically it would be the last day of the month in which you studied. So, it wouldn’t necessarily be the June 10th when you wrote your exam, it wouldn’t necessarily be June 20th when you graduated; it would be perhaps June 30th if that was the end study date for you.
Doug H: So, generally it's going to be the last day of the month. So, what you're talking about is the end of study date, and that's the date that matters. So, if my exam was on the 10th of May let's say, my end of study date is probably May the 31st.
Dan V: That's correct.
Doug H: But not necessarily because who knows? We're not the ones who make up the rules. We're not the ones who interpret them.
Dan V: That's correct and it can vary depending on the circumstances. For instance, we've had a case where the individual left their studies early so it wasn’t actually the last day of that month; it was actually for that period. So, let's say the term ended at December 31st, that was actually their end of study period.
Doug H: So, if they were to leave school in October.
Dan V: Likely it would be the December 31st, provided that it is a term semester that ends in the end of December.
Doug H: So, if you're a conventional student, you finish your terms, you do your exams, you graduate, then it's a little simpler to figure out. But if you had to leave school part way through a term, perhaps for medical reasons, had to go home and take care of a sick parent, you got a great job and said forget about school. I'm going to go make some money, the end of study date could very easily be the end of the term, not the end of the month that you last were in school.
Dan V: That's correct.
Doug H: So, have you ever run into a case where someone thought oh yeah, I know this is the last day and they go and go bankrupt and they find out uh oh I was too early. Has that ever happened in real life?
Dan V: Absolutely, we've seen it a number of occasions. The most shocking example, or pressing example, that comes to mind was one where the individual was one day late.
Doug H: One day late.
Dan V: So, essentially if they would have waited another day to file their bankruptcy, they would have been outside the - at that time it was a 10 year period, but for our purposes it would be the seven year period that we're talking about.
Doug H: Wow. And yes the rules have evolved in this area. It used to be that there was no special rule for student loans. They were just like every other thing. Then the government brought in a two year rule, then they upped that to a ten year rule. And then back in I believe it was either the 2008 or 2009 amendments, they lowered it back, or lowered it to seven years.
So, but the process has really been the same, it's just that the number has been different. So, we're recording this in 2015, in the summer of 2015, so if you happen to be listening to an old version of this podcast, five years in the future, then you might want to check to see if the government has changed the law again, which I think is quite possible in the future. But as of today it's seven years.
So, in that particular case, the guy goes bankrupt, it turns out he is one day short, which means his student loan is not automatically discharged, so what happened? Why do you know about this case? Why did you get involved in it?
Dan V: We became involved because they were trying to have their student loans discharged under what we call a hardship application. And that's under the section 178, 1.1 of the Bankruptcy Insolvency Act. And that deals with an application to have your student loans discharged after the five year period you talked about earlier.
Doug H: Okay. So, let's talk about this then. So, normally it's seven years, but there is a special rule - we call it the hardship rule - but you're right it's part of section 178 of the Act. And section 178 is the section of the Bankruptcy and Insolvency Act that goes through a whole bunch of things that affect your discharge; that's where those provisions are. And that section says oh we got this special rule, if it's only been five years, you can go to court and convince the judge or the registrar to get rid of either all or your student loans.
Dan V: Correct and in most cases it's not actually just been five years. In most cases, like we talked about earlier, you need, first you need to be discharged or you need to be bankrupt first. So, in some cases you could actually apply during the course of your bankruptcy. Most often we see it, the person's been discharged, a couple years down the road they're still having continued financial difficulty paying their day to day debts, let alone their student debts that, you know, continue to be with them cause they weren't discharged during the course of their bankruptcy.
Doug H: Yeah and that's a key point you made there. We're talking about bankruptcy legislation here. So, if you have a student loan and you can't pay it, you can't just go to court and say to the judge, hey, can you make it go away it's been five years or seven years. No, you have to have gone bankrupt first, or file a consumer proposal first. Am I correct on that? The rules are essentially identical whether it's a bankruptcy or consumer proposal, the five year period, the seven year period, whatever.
Dan V: Correct and that's a very good point. It does apply to a consumer proposal just as much as it applies to a bankruptcy.
Doug H: So, in the particular case you're talking about, the guy goes bankrupt, thinks his student loan's going to go away but it turns out he was one day short so it isn’t. His bankruptcy ends, he gets his discharge cause he does everything he was supposed to do, but his student loan is still there. It still exists; they can still pursue him for money, he still owes the money.
So, he then went back to court, obviously with you to help him, to say to the judge, hey you know what judge? This isn’t fair, I can't pay my loan. And of course the judge said well fairness doesn’t really have anything to do with it; there's a specific provision of the law that says if you are suffering hardship then the court has the discretion to either make the loan go away or wave it or leave it.
So, I'd like to get into what is this hardship? How does it work? What are the requirements?
What we're going to do first is take a quick break and then we're going to come back and talk about financial hardship when it comes to student loans in a bankruptcy or consumer proposal. My guest today is Dan Veinot and you're listening to Debt Free in 30. We'll be right back.
Doug H: We're back here on Debt Free in 30. My guest today is Daniel Veinot, who is a lawyer with Duncan Linton in Waterloo, Ontario. And we're talking about student loans.
Before the break, Dan, you were explaining that you can go to court and have your student loan discharged if the regular process didn’t discharge it. So, in a bankruptcy or consumer proposal a student loan is automatically discharged provided everything else goes according to plan, if you've been out of school, you've ceased to be a student for seven years.
But there's a special rule that says, well actually, after five years you can go to court and ask the court to modify or eliminate your student loan. So, you have to have gone bankrupt and five years have to have transpired; so, instead of seven years it's five years since you ceased to be a student. In most cases that you've been involved with, the bankruptcy is already over, I've been discharged but I'm not able to make these payments. So, it could actually be six, seven, eight, nine years later but because the student loan wasn’t discharged, you go to court.
And typically you're going to have a lawyer do this for you, because unless you're familiar with all the court forms and procedures and how to file your motion materials and all the rest of it, it's generally better to have someone who knows what they're doing, do it. So, you are representing the bankrupt, who wants to use this hardship provision. There are I believe two different criteria that have to be met in order to get the court to agree. So, point form number one is?
Dan V: Has the party acted in good faith with respect to the loans.
Doug H: Okay, good faith and then the second point is?
Dan V: Continued financial difficulty.
Doug H: Okay. So, let's break those down. What does good faith mean? What does it mean that I've acted in good faith?
Dan V: Well, there's a number of factors that the court will look at. For instance, whether the money was used for the purpose it was loaned.
Doug H: Okay. So, if I got a student loan, bought a car, never went to school, that doesn’t sound like good faith.
Dan V: No. And what the court's looking at and did you use the money loan to pay your tuition, to pay your books, to pay your residence if you were living in residence? Those are the types of things the court looks at, not the example like you mentioned.
Doug H: Right, okay.
Dan V: I bought a car and I never went to school, I dropped out after the first week of classes.
Doug H: But I got a great car out of it. So, that seems pretty simple. Are there any contentious related to good faith?
Dan V: There are. I mean, sometimes one of the primary ones, primary concerns that the government has whether or not the party actually completed their studies. That will often be - and that leads us to the second aspect of good faith, is whether the party actually completed their education and deprived some economic benefit from it. So, were they able to actually find employment in their field of study? So, if they studied business were they able to find a job in the business, whether that be an accountant or in that field of study?
Doug H: So, if I went to school to become a doctor, I now am a doctor, and getting paid like a doctor, the court is more than likely going to say yeah you know what? You should pay that loan back.
Dan V: Yes, that's typically how the courts have looked at it, if you are able to gain some benefit from that education. That's not the only determinant factor. There's other factors as well including did they use reasonable steps to pay their debt? So, prior to filing bankruptcy or even after filing bankruptcy, and because the loans are still there, do they take steps to actually pay? And I mean we're not talking perhaps the full amount of the loan, you know the monthly payment that's due, but we're talking about a reasonable amount they can pay based on their income.
Doug H: So, if five years have gone by and I've never made a single payment, I better have a good reason for that.
Dan V: Right, you better have: I was living on minimum wage and there was no extra money for me to be able to -
Doug H: It was impossible. Whereas if I did have some kind of job, at least if I was making a $50 payment or $100 payment every month then that is going to help my argument that I did the best I could. And that's kind of what good faith is. You know, I did the best I could is really what you're looking for.
If I went to school to be a hairdresser and the private college I went to went out of business.
Dan V: That's something we have seen and sometimes the court will say you know what? Because of the loss of reputation, perhaps you're having difficulty finding a job because of that school closing its doors. Or perhaps because you weren’t able to complete your education because of that, going back to one of our earlier topics of did you complete your studies, those would be things that the court would consider. And we have actually seen that where colleges have gone out of business and I had an individual who was actually working in the technology sector and because of the fact that the college went out of business, it wasn’t looked upon as -
Doug H: Not as good an education as if it was a college that still existed, so not really my fault that the college went out of business, the court's going to be a little bit more lenient.
So, okay are there any other points then related to good faith that we needed to talk about?
Dan V: Yeah, another big one I think, and important one is: has the party actually looked into interest relief? Because students can apply if their financial means do not permit them to make monthly payments. So they're allowed to apply for interest relief and the court looks at, did you take advantage of that interest relief? Whether you applied and didn’t qualify because the cap is fairly low surprisingly for not qualifying for interest relief.
So, the court looks at that and did you maximize that? So, depending on the province you're in and the circumstances and timing of when you finish your studies, you're eligible for interest relief. So, they look at did you apply for those means, those other options to supplement things?
Doug H: Yeah, so have you done what you could have done? Did you try to get a job? Did you try to make payments? Did you apply for interest relief? That's kind of the whole good faith argument.
Okay, so let's a look at the second one which I think is probably a bit more contentious and maybe a little more confusing. Continued financial difficulty, you have to demonstrate to the court that if you're student loan doesn’t get wiped out. You're going to continue to suffer financial harm. What's that all about? What does that mean?
Dan V: And that is absolutely the more difficult part of the test. And courts have not sent a rigid regime of how do we interpret that, but generally speaking, the courts say, we don’t look 10 years into the future to say in the next ten years.
Doug H: No one can look that far ahead.
Dan V: Right, no one has a crystal ball. But they typically say, you know, in the next two or three years where are things going to be? And some examples we've seen are for instance veterinarians who were doing internship or extra school they need to before they can get their full license, that was one of the aspects we've seen. And the court said well for the next two or three years this person's still not going to be able to - they're not going to be a full vet. They're not going to be able to make the income that was expected and they have discharged those loans in some instances such as that.
Doug H: So, if my education is the kind of thing where great, I've graduated now but it's a long slow road to ramp up to full income because there's a long apprenticeship period, studying period, whatever, that may be an argument that yeah I am going to have continued financial difficulty. So, okay that kind of makes sense. Any other components related to that, that you would have to demonstrate to the court?
Dan V: The court does look at whether or not - and I disagree on this aspect to some degree - as to whether or not the individual has surplus income and this is under - well, for instance while they're bankrupt and we talk about surplus income and whether they have surplus income. And the courts have looked to see whether or not their family has surplus income or whether that individual has surplus income.
We've argued, and successfully argued, that shouldn’t be taken into account. Although there's courts that have said we do look at the surplus income. But my position as I have put forward, and it has been accepted by the courts in some instances, is that really that surplus income is during the course of your bankruptcy. And for the average bankrupt, without any special circumstances, you're probably looking at nine months if it's first time bankruptcy. So, I'm saying, you know, it's to keep you on a tight budget during the course of your bankruptcy, but you shouldn’t be penalized for the next forever.
Doug H: Right.
Dan V: Five years or so. So, that is something the courts do look at though, to some degree, so that is a factor to consider. But the courts have interpreted that in different ways.
Doug H: And I guess this is kind of the classic example where having a lawyer who has been in court before, who understands what the court is looking for, is to your advantage. Because when the judge says well you have surplus income, I'm going to make you make you pay this, you can say well yes that's true your honour but, here are other cases where you've ruled differently or the courts have ruled differently. And here's why it's the fair and just thing to do in this case. And as a result you can get the desired result I guess. And am I correct in saying that the court can either wipe out the student loan, or lower it, or do nothing? Those are the three choices?
Dan V: Actually they only have, well they have three options. They can either grant the application which means the student loans are discharged completely or they can deny the application which means the student loans are there in their entire amount or they can adjourn the applications; in some instances they're not satisfied and that -
Doug H: They want to see more paperwork, more proof that you're suffering hardship, that kind of thing?
Dan V: That and sometimes they also want to see what the future will bring. So, for instance someone may come in (and I've had this happen) where they've recently lost their job and they say well I'm not sure if I'm going to be able to find a job in my field. You know, yes I was making reasonable money and there was a prospect of me advancing but I've recently lost my job through no fault of my own.
And the court says well, it's been two months and you haven’t found a job, but we're not satisfied that, you know, land on your feet and find another job to replace that income. So, sometimes it will adjourn it. It could be months, it could be even a year in some instances where they will adjourn it and ask the party to come back and reassess it at that time. But they can't reduce the amount unfortunately so it's all or nothing.
Doug H: All or nothing deal, then. So, okay and I can see why the court would adjourn and come back in a number of months, yes we now see that what you said is correct so the loan is wiped out, or no your circumstances are way better, or no it isn't.
Doug H: So, great well I appreciate that, Dan. That's a good overview of how the court process works, when it comes to a hardship provision. We'll be right back to wrap it up. You're listening to Debt Free in 30.
Let's Get Started Segment
Doug H: It's time for the Let's Get Started segment here on Debt Free in 30. You've heard Daniel Veinot, a lawyer, explain how the court process works for student loan hardship applications but just how big a problem are student loans?
Well, when it comes to student loans and bankruptcy, let me tell you some scary facts. In our Joe Debtor study that we released in May 2015, which you can read by going to joedebtor.ca, we discovered that 13.4% of the people who go bankrupt for file a consumer proposal with Hoyes Michalos have student loans, which is a slight increase over the 12.7 level when we did the survey two years ago.
That may seem like a stable number but it's more worrisome that the average student loan debt at the time of their insolvency, increased much more significantly; up 4.3% and over the last two years to an average student debt level of just under $14,000. Now, $14,000 may not seem like a big number, but remember that a government guaranteed student loan is only automatically wiped out in a bankruptcy if you've been out of school for at least seven years at the time you file bankruptcy. That means that many former students have tried for at least seven years to pay off their student loans, and they're still burdened with almost $14,000 in student debt many years after they leave school.
Here's another scary statistic. 60% of student loan debtors are female and female student debtors owe on average $14,748 which is 19% more than male student loan debtors. We call female student loan debtors Jane Student and while Jane Student has higher loan amounts owing, she's actually earning on average $2,288 per month at the time of her insolvency which is just slightly higher than the male student loan debtor who was earning $2,266.
So, why are females more likely to have student loan debt problems than males if they're actually earning slightly more money? One possible explanation is that, at the time of their filing, they're less likely to be working. While 91% of male student loan debtors are employed only 83% of female student loan debtors reported that they were working at the time of their insolvency. So, if Jane Student is earning more than Joe Student but fewer of them are working, it's clear that the ones that are working are earning a significant amount more than males; that's how the averages work.
So, why is it that if Jane Student is earning more than Joe student, she's more likely to have student debt problems? Based on our study, overall student loan debtors (whether male or female), are increasingly filing for insolvency when they're unable to find work that allows them to earn enough money to repay their massive student loan debt.
However we discovered that the female student loan debtor has additional difficulty repaying her loans. Jane Student finds herself out of work more often than her male counterpart either due to unemployment, disability, maternity leave or other factors such as caring for a family member. As a result her earnings are less stable and she is less able to keep up with her regular student loan payments once she's out of school. This may explain why Jane Student owes on average 19% more than Joe Student despite the fact that they are relatively the same age and have comparable earnings at the time of filing.
Here are three more facts from our study. 26% of student loan debtors have a payday loan, which is a lot higher than the 18% for the average person. The average payday loan debt for the student debtor is $2,461. Finally, one in four student debtors are single parents, which makes it even more difficult to balance their budget.
The message here is that student loan debt is a big problem. So, here's my advice for students: to start, before you go deep into debt to get an education, start thinking about how you will pay the loan back. Going to school for four years and ending up with a degree that won't get you a job doesn’t make a whole lot of sense.
I'm not saying don’t go to college, I'm saying have a plan to minimize the amount you need to borrow and have a plan to pay off your loans as soon as possible when you graduate. That may mean working for a year before you go to college, or going to a college close to home, or perhaps having a part-time job in college so you can pay more of your own way. It's also a good idea to investigate all possible scholarships and bursaries to reduce the cost of your education. Whatever you can do to lower your costs is going to help you in the long run.
Post secondary education should be a positive experience, and for most students it is, but you don’t want to suffer for years and years after graduating with student loans. So, advance planning is very important. Do your homework.
I'll be back after this quick break to wrap up the show. That was the Let's Get Started segment right here on Debt Free in 30.
Announcer: You're listening to Debt Free in 30. Here's your host, Doug Hoyes.
Doug H: Welcome back, it's time for the 30 second recap of what we discussed today. On today's show, Daniel Veinot, a lawyer who appears regularly in bankruptcy court, explained that it's possible to discharge a student loan that is between five and seven years old when you go bankrupt, under the hardship provisions under the Bankruptcy and Insolvency Act. And he explained the two requirements for a successful hardship application: good faith and continued financial difficulty. That's the 30 second recap of what we discussed today.
So, is it really necessary to hire a lawyer to represent you in court in a student loan hardship hearing? No, it's not absolutely necessary, you could do it yourself, but in my experience your chances of success are much higher if you hire an experienced lawyer who knows what the court is looking for. The rules and the paperwork are complex. So, in most cases a good lawyer is money well spent.
That's our show for today. Full show notes are available on our website including details on what happens to student loans in bankruptcy. So, please go to our website at hoyes.com, that's h-o-y-e-s.com for more information. Thanks for listening. Until next week, I'm Doug Hoyes, that was Debt Free in 30.