Debts not released by bankruptcy – Professional Student Loans

November 22nd, 2012 by

One of the main purposes of the Bankruptcy and Insolvency Act[1] is to allow debtors in unfortunate circumstances to get a fresh start, free of their debts.  With limited exceptions, an order of discharge from bankruptcy releases the bankrupt from all unsecured debts.  One of the exceptions is a student loan from the government, under the Canada Student Loans Act, the Canada Student Financial Assistance Act, or any similar provincial law.  If you borrow money from the government to fund your education, bankruptcy will not get rid of that debt and you will need to pay it back after your bankruptcy. 

There are also several court decisions[2] in support of the idea that private student loans that are used to fund professional degree educations, such as medicine, dentistry, law, chiropractic college and others, should also be repaid and not be released by discharge from bankruptcy.  Loans from banks are not considered to be the same as government student loans under the BIA, and would generally be released upon discharge.  These loans are granted as a result of business decisions of banks, rather than under provincial student loan laws.  However, the courts have found, in certain circumstances, that private student loans should be treated similarly to government student loans in a bankruptcy.

 The reasoning is essentially that, unlike other debts, a student seeks a loan from a bank to fund her education with a view to eventually graduating and earning a substantial income through her professional degree.  The bank lends funds on the expectation that it will be repaid years down the road from the professional’s higher salary.  Similarly, the student expects to graduate with a significant amount of debt owed to the bank for her education, and that she will repay that debt from her higher salary obtained through that education.  The court may not allow a student to take loans to fund a professional degree, then attempt to get out of her repayment obligations by filing for bankruptcy.

 Each case depends on its own circumstances, and to date, the BIA only recognizes government student loans in section 178(1) as a specific debt not released by order of discharge.  If the private student loan is only a small part of a long list of debts of the bankrupt, for example, a court may not treat the private student loan any differently from other debts released by order of discharge.  Creditors, such as banks and private lenders, should seek legal advice where a professional student loan is involved in a bankruptcy.  There may be options available to collect on a private student loan even in the face of a bankruptcy that can result in much higher recovery for the creditor than originally thought.

 If you have any questions regarding section 178(1) debts not released by order of discharge in a bankruptcy, please contact a lawyer in the Bankruptcy Insolvency and Recovery Practice Group at Devry Smith Frank LLP.  We advise creditors, debtors, receivers and trustees with regard to large and small restructurings, including personal and corporate bankruptcy, consumer and Division I proposals and corporate restructurings under the CCAA.

[1] R.S.C. 1985, c. B-3, as amended.

[2] See, for example, Re Korenic, 2005 CanLII 28179 (ON S.C.), Re Ament, 2006 CanLII 30583 (ON S.C.) and Re Manning, 2011 ABQB 566.

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