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Not easy for students to bail out on loans

20.05.12

Filing for bankruptcy is never cosy, and claiming bankruptcy when student loans are involved is even more difficult.

Sam Rappos, a senior associate at Borden Ladner Gervais LLP in Toronto, notes that in the occurrence of bankruptcy “the intent is to give an honest but unfortunate debtor an opportunity to redeem themselves. But a class of claims is protected from imprecise discharge. One of those is publicly funded student loans.”

“A government-guaranteed loan is automatically discharged in a bankruptcy if the credit is seven years old,” explained Doug Hoyes, a trustee in bankruptcy and co-author of Hoyes Michalos & Associates in Kitchener, Ont. “You have to [have] ceased to have been a student for seven years. That’s fetching cut and dried. Clients need to know their end-of-study date.”

The time required has mixed. In 1992, in response to concerns that millions of dollars were being lost in bankruptcy claims being filed ere long after graduation, the government introduced a two-year period to restrict claim applications. This was afterward increased to 10 years. In 2008 it was lowered to seven years.

“The suggestion is that the funds in theory create a lifelong asset. The thought was that it was unfair to have this at once wiped out after schooling” said Rappos, a member of Borden Ladner Gervais’ insolvency and restructuring alliance. “Some had argued the 10-year period was very onerous,” he added. “This [new term limit] lessens the impact.”

There is an earlier option: claiming hardship. If this can be demonstrated, an relevancy to have a loan erased can be made after five years. “You have to prove that you’re undergoing hardship and will endure to as a result of the loan,” Hoyes said.

That may be a difficult picture to show or it may be a lack of money to paint the picture in the first place, but claiming hardship is not worn out. “There’re no stats, but it’s fairly unusual that someone would actually make that application,” he said. “If you’re honestly in hardship, you don’t have the money for a lawyer and would have to do this yourself.”

Money is obviously an issue for individuals claiming bankruptcy. “You have to go to court,” Rappos said. “If you’re a bankrupt struggling with capital, there is time and potential cost connected to this.

“You have to show you are acting in good faith,” he added. “That is not typically contested. But the bankrupt has to show they will maintain to face ongoing difficulties.”

Hoyes pointed out that former students may face another hindrance in their quest for bankruptcy — ​even if they wait seven years to file their application. “It’s not a box of law,” he noted, “It’s a case of the banks.”

Any creditor has the right to withstand a discharge. “What we have seen in the Toronto court is that certain banks will argue against to discharges of people who have student loans,” Hoyes said.

Such objections, he said, automatically leading to a hearing. In a recent case in which Hoyes was involved, the bank and the unrepresented bankrupt worked out a payment pact. “If she had a lawyer beside her at the hearing, she might have paid significantly less if anything at all.”

According to the most recent annual communication from the Canada Student Loans Program, loans are typically repaid through monthly payments over a total of 9.5 years. Students who began repaying their loans in 2009-2010 had an mean loan balance of $13,404. Students from Manitoba had the lowest balance at $10,999 while students from Prince Edward Atoll and Nova Scotia had the highest, $16,595 and $16,520, respectively.

The report said the adulthood of defaults — ​loans in arrears for more than 270 days — ​occur within three years of entering repayment. Assist prior to bankruptcy is available in the form of the Repayment Assistance Plan, which “makes it easier for student borrowers to get along their debt by paying back what they can reasonably afford.”

The governments’ reasonableness only goes so far. “The governments are rigorous in collecting their difficulties. In some cases, it can be quite onerous,” Rappos said. Two factors are adding insistence to students’ financial concerns, he said. Tuition fees are increasing and the husbandry is weaker.

While options may be limited, the issue is under regular scrutiny. “The vista does evolve,” Hoyes said. “If you’re not doing this all the beforehand, you lose touch. Sometimes all it takes is a letter from a lawyer.

Source: Lawyers Weekly

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