Treatment of Government Student Loans in the Bankruptcy Context – Hardship Applications Part 2

The Hardship Application

If a government student loan is not forgiven in a bankruptcy, a student loan debtor has the right to make a hardship application for legal forgiveness of their government student loans under section 178(1)(g)(1.1) of the Bankruptcy and Insolvency Act (“BIA”). This relief is only available if the student loan debtor ceases to be a full or part-time student for the past five years or longer.

In a hardship application, the student loan debtor must satisfy the court under section 178(1.1) that:

  • (a) the debtor has acted in good faith regarding his or her student loan debts; and
  • (b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.

The burden is on the student loan debtor to satisfy the court that both criteria have been met. A court is unable to partially reduce the student loan indebtedness: the student loan debt is either completely extinguished or it survives.

Good Faith Requirement

In determining whether a student loan debtor acted in good faith, a court may consider one or more of the following factors:

  • (1) Was the money used for the purpose loaned?
  • (2) Did the applicant complete the education or make an honest effort to do so?
  • (3) Did the applicant derive benefit from the education in the sense of gaining employment in an area directly related to the education?
  • (4) Did the applicant make reasonable efforts to pay the loan or did the applicant make an immediate assignment into bankruptcy?
  • (5) Did the applicant take advantage of other options with respect to the loan such as interest relief or loan remission?
  • (6) Was the applicant extravagant or irresponsible with her finances?
  • (7) Did the applicant fairly disclose her circumstances on the application for the loan in the sense of acting with an honest intention?

It is a fact sensitive inquiry whether a student loan debtor can convince the court that he or she acted in good faith regarding his or her student loans.

The Applicant will continue to experience financial difficulties

Given the sparse decisions on section 178(1)(g)(1.1)(b), the British Columbia courts have looked to guidance from other provinces. The courts have also consistently interpreted section 178(1)(g)(1.1)(b) of the BIA to be consistent with the “fresh start principal” that honest but unfortunate debtors are entitled to a fresh start from their debts.

Two recent decisions of the BC Supreme Court involving hardship applications are found in Re Miller, 2016 BCSC 787 (“Re Miller”) and Re Roy, 2016 BCSC 1845 (“Re Roy”).

The court in both decisions cited the Nova Scotia Supreme Court case Re Cook, 2010 NSSC 224. Re Cook was cited for the principle that an individual should not be burdened with student loan debt that will take most of the person’s working life to pay off. Re Dunn 2012 NSSC 240 was cited for the principle that repaying a student loan for longer than ten years was too long. In both Re Miller and Re Roy, the student loan debtors satisfied the court that they acted in good faith and would continue to experience hardship as a result of their student loan obligations. As a result, the court ordered that student loans be relieved of their student loan obligations.

The court in Re Roy noted that even when a student loan debtor has satisfied the court under section 178(1)(g)(1.1), the court retains discretion whether to grant the relief sought. The court did not elaborate what factors it would consider when exercising its discretion when refusing to forgive a student loan. This question has been left for another day.

Conclusion

A hardship application requires a student loan debtor to adhere to procedural and evidentiary formalities. Otherwise, a student loan debtor may find that their evidence is incomplete or inadmissible, or irrelevant. The court may adjourn the hearing resulting in wasted time and resources for all those involved.

The individual facts often determine whether a student loan debtor can satisfy the court in a hardship application. A court may weigh all relevant factors and the circumstances surrounding the student loan debtor’s failure to make good on his or her student loan obligations when deciding whether to relieve student loan obligations.

There may be additional barriers to making a hardship application. As in the Re Roy decision, the student loan authorities may oppose a hardship application. An individual who is considering a hardship application for forgiveness of their government student loans should discuss their situation with a lawyer who focuses their practice on bankruptcy and insolvency matters or a Licensed Insolvency Trustee.