Kelly Student Loan Bankruptcy Case

2000 CarswellOnt 4170
20 C.B.R. (4th) 251

Kelly, Re

In the Matter of the Bankruptcy of Kimberley Kelly of the City of Toronto, in the Province of Ontario
Ontario Superior Court of Justice (In Bankruptcy and Insolvency)

Deputy Registrar Sproat

Heard: September 22, 2000
Judgment: November 6, 2000
Docket: 31-338171

Counsel:
K. Kelly for herself.
E. Dumitru, for Her Majesty the Queen in Right of the Province of Ontario as represented by the Minister of Education and Training, Ontario Student Loans Plan.
D. Nakelsky, for Her Majesty the Queen as represented by the Minister of Human Resources, Canada Student Loans Program.

Subject: Insolvency

Bankruptcy --- Discharge of bankrupt — Conditional discharge — Student loans

Bankrupt obtained provincial and federal student loans to further her post-secondary education — Bankrupt graduated with two degrees and was qualified as teacher — After seeking employment as teacher for two years, bankrupt was eventually employed as receptionist, and then underwriting assistant, at insurance company — Bankrupt made assignment in bankruptcy and was awarded discharge upon fulfilling condition of counselling — Bankrupt brought application under s. 178(1.1) of Bankruptcy and Insolvency Act to release her of student loan liabilities — Application dismissed — Bankrupt was entitled to bring action as mandatory two years had lapsed since bankrupt was full-time student — Bankrupt failed to satisfy onus of establishing that she acted in good faith and that she had and would continue to experience financial difficulty to extent she was unable to make student loan payments — Bankrupt did not make reasonable efforts to secure employment as teacher, failed to explore options to reduce or avoid loan burden, and made her assignment two months after securing full-time employment — Bankrupt had paid regularly into RRSPs since being employed full-time and chose not to use RRSPs, tax refunds or bonuses from employer to pay down student loans — Bankrupt had steady employment, was remunerated well, and was employable for many years — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178(1.1).

Cases considered by Deputy Registrar Sproat:
Minto, Re (1999), 14 C.B.R. (4th) 235, (sub nom. Minto (Bankrupt), Re) 191 Sask. R. 1 (Sask. Q.B.) — applied

Statutes considered:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3
Generally — considered

s. 178(1) — considered

s. 178(1)(g) [re-en. 1997, c. 12, s. 105(2)] — considered

s. 178(1.1) [en. 1997, c. 12, s. 105(3)] — considered

s. 178(2) — considered

Canada Student Loans Act, R.S.C. 1985, c. S-23
Generally — referred to

APPLICATION by bankrupt for order under s. 178(1.1) of Bankruptcy and Insolvency Act releasing bankrupt of student loan liabilities.

Deputy Registrar Sproat:

1 This is one of four applications heard together, for an order under subsection 178(1.1) of the Bankruptcy and Insolvency Act (the "BIA") that paragraph 178(1)(g) of the BIA no longer applies to the bankrupt. Such an order would have the effect of releasing the bankrupt from liability for student loans, as defined in paragraph 178(1)(g). For the purpose of these reasons, I will simply refer to such indebtedness as "student loans". The application is opposed by both the Ontario Student Loans Plan and Canada Student Loans Program.

The Facts

2 The bankrupt obtained Canada student loans and Ontario student loans of about $8,000 and $15,278, respectively, for furthering her post-secondary education. She attended York University from 1992 to 1996 and graduated in 1996 with a Bachelor of Arts degree in Psychology and a Bachelor of Arts degree in Education. She is a qualified teacher. She searched for a teaching position for about 1 to 2 years and did volunteer work in various private and public schools in the hopes of "getting her foot in the door". As a mother of two teenaged children, she received family benefits during this period.

3 The bankrupt was unable to secure employment as a teacher and, in August, 1997, she obtained work as a receptionist with Security Insurance Company of Hartford ("Hartford"). She earned $24,000 per annum in this position. She has remained employed with Hartford continuously since August, 1997. The bankrupt has proven to be a good employee and was recently promoted. She is now an underwriting assistant with Hartford, which has been described as an administrative position. She earns $37,000 per annum and has enjoyed a bonus in the past years (the latest being $1,350 received March, 2000).

4 The bankrupt claims that she had difficulty servicing her debts and therefore she made an assignment in bankruptcy on October 6, 1997, two months after securing full-time employment with Hartford. She had limited contact from the administrators of the Ontario Student Loans Plan and said that she contacted a representative of the Royal Bank of Canada and her MPP about her student loan. She admitted, however, that she largely ignored the situation of her student loans and, in fact, she made no payments on account of this indebtedness.

5 On August 13, 1998, the bankrupt obtained a conditional order of discharge from the court. The condition related to the completion of the mandatory counselling requirement. She fulfilled this condition and obtained her discharge in May, 2000.

Discussion

6 The bankrupt brings this application under subsection 178(1.1) of the BIA. Before turning to the merits of this application, it may be helpful to provide some history as to debts or obligations in respect of loans made under the Canada Student Loans Act and other similar legislation. Until 1997, such liabilities were released by an order of discharge from bankruptcy, by operation of subsection 178(2) of the BIA, which provides that all claims provable in bankruptcy (with the exception of debts referred to in subsection 178(1)) are released by an order of discharge.

7 However, in 1997, the BIA was amended. Subsection 178(1) of the BIA was amended to add paragraph 178(1)(g), which thereby excepted student loans from the operation of subsection 178(2) of the BIA. The amendment came into force on September 30, 1997. Thus, if the date of bankruptcy was after September 30, 1997, student loans were not automatically released by an order of discharge. A further amendment (subsection 178(1.1) of the BIA) was enacted to permit the bankrupt to effectively apply for the release of student loans upon the expiry of two years after the bankrupt ceased to be a full or part-time student.

8 These amendments were motivated by the recognition that a bankrupt had and would continue to have the benefit from the education he or she obtained with the assistance of the student loans and to address a perceived abuse of the bankruptcy process. It was said that:
The broad purpose of the Act is to permit honest but unfortunate debtors to obtain a discharge of their obligations in order to facilitate a return to stable participation in social and economic life, while balancing this objective against the interests of creditors. Section 178(1)(g) reflects a policy decision which accords with this objective and recognizes that student loans involve a situation where funds are advanced when there is no existing capacity of the debtor to repay the debt, but education obtained will hopefully enable the debtor to begin active and fruitful participation in the economy at some later date.

Realization of earning potential associated with education can take some period of time after leaving school, so Parliament saw fit to disallow the immediate discharge of student loans, in this case for two years after ceasing to be a student. This measure addressed the perceived abuse of students using the Act to obtain a discharge of student loans prior to making reasonable efforts to realize upon their earning potential achieved through education.
(See Re Minto (1999), 14 C.B.R. (4th) 235 (Sask. Q.B.) at paragraph 16)

9 Thus, the date on which the bankrupt filed for bankruptcy is of importance as to whether student loans are or are not automatically released. If a bankrupt made an assignment on or after September 30, 1997, liabilities for student loans were not released upon an order of discharge. In such a bankruptcy, to be released of liability for student loans, the bankrupt is required to bring an application under subsection 178(1.1) of the BIA, after the expiry of two years from the date the bankrupt ceased being a full or part-time student, for the requisite order.

10 To complicate matters somewhat further, the BIA was again amended in 1998 to increase the time after which the bankrupt could apply to the court for an order under subsection 178(1.1). Thus, if the date of bankruptcy was on or after June 18, 1998, the bankrupt was not entitled to bring an application for the release of student loans until after the expiry of 10 years (as opposed to the 2 year period resulting from the 1997 amendments) from the date the bankrupt ceased being a full or part-time student.

11 Thus, there are now three relevent time periods, insofar as student loan obligations are concerned. They are:
1. if the date of bankruptcy was after December, 1992 but before September 30, 1997, debts or obligations in respect of student loans were released by an order of discharge;

2. if the date of bankruptcy was on or after September 30, 1997 but before June 18, 1998, the bankrupt's student loans were not released by an order of discharge and the bankrupt was obligated to wait 2 years from the time the bankrupt ceased being a full or part-time student before applying to the court for an order that the student loans be released; and

3. if the date of bankruptcy was on or after June 18, 1998, the bankrupt's student loans were not released and the bankrupt was obligated to wait 10 years from the time the bankrupt ceased being a full or part-time student before applying to the court for an order that the student loans be released.
12 In this case, the date of bankruptcy is October 6, 1997. The bankrupt ceased being a full time student in April, 1996 and two years have since lapsed. The bankrupt is therefore entitled to bring this application for a release of her student loan obligations.

13 The test which the bankrupt must meet on this application is set forth in subsection 178(1.1) of the BIA which provided (in 1997) as follows:
At any time after two years after a bankrupt who has a debt referred to in paragraph (1)(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that
(a) the bankrupt has acted in good faith in connection with the bankrupt's liabilities under the loan; 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 liabilities under the loan.
14 The test is conjunctive and the bankrupt therefore has the onus of establishing on a balance of probabilities that she has acted in good faith and has and will continue to experience financial difficulty such that she will be unable to pay her student loan liabilities.

(a) Good Faith

15 Given the existence of the two year waiting period before an application could be brought for an order releasing student loans, there have been few occasions (until recently) where the court was required to consider the test set forth in subsection 178(1.1) of the BIA and what factors the court should consider on such an application.

16 In Re Minto, supra, Registrar Herauf referred to the factors which the court had considered on applications for discharge of a bankrupt with student loans and determined that these same factors were relevant to an application under subsection 178(1.1) of the BIA. I agree. In Re Minto, Registrar Herauf summarized the following factors as relevant to the determination of the issue of "good faith": whether the money was used for the purpose loaned, whether the applicant completed the education, whether the applicant derived economic benefit from the education (i.e. is the applicant employed in an area directly related to the education), whether the applicant has made reasonable efforts to repay the debts and whether the applicant has made use of available options such as interest relief, remission, etc.

17 However, I do not see these factors as exhaustive. I would add that the timing of the bankruptcy and whether the student loans form a significant part of the bankrupt's overall indebtedness as of the date of bankruptcy are factors that the court could consider in the determination of the good faith aspect of the test. I am of this view given the purpose of and the policy reasons for the 1997 amendments to the BIA.

18 Having regard to the facts of this case, I am of the view that the bankrupt has not acted in good faith. I am not satisfied that the bankrupt made reasonable efforts to secure employment as a teacher (although I think that she did make some efforts). However, that is not all. I find as fact that the bankrupt failed to make any inquiries or at least meaningful inquiries as to the options which might have been available to her to reduce or avoid, at least in part, the burden relating to her student loans. For example, she may have been entitled to interest relief or loan forgiveness. She did not pursue these avenues of relief and admittedly ignored her student loan obligations.

19 I think it also significant that she made her assignment in bankruptcy two months after she secured gainful employment. She claimed to have done so because she could not service her debts. In addition, the bankrupt had financial ability to make some provision for her student loans. She has, over the period August, 1997 to the present, managed to contribute about $4,500 into an RRSP plan (presumably on a receptionists' salary of $24,000 given that her promotion was recent). Yet, the bankrupt has made no provision for her student loans. In my view, the bankrupt has not made reasonable efforts to pay the student loans.

20 I therefore find that the bankrupt fails on the first branch of the test on this application.

(b) Financial Difficulty

21 As to the second branch of the test, it is necessary for the bankrupt to establish that she has and will continue to experience financial difficulty to such an extent that she will be unable to pay the student loans.

22 The issue as to whether a bankrupt "will continue to experience financial difficulty" will in most cases pose the biggest obstacle for bankrupts bringing a subsection 178(1.1) application. The BIA does not provide any guidance to the court as to the appropriate duration of time into the future wherein the bankrupt must experience this financial difficulty. I agree with Registrar Herauf that the time period cannot be established with certainty and is dependent upon the facts of the particular case.

23 In this case, I am not satisfied that the bankrupt has, in the past, experienced financial difficulty to such an extent that she was unable to pay her student loans. I come to this view as she has been employed on a full-time basis for about 3 years. During this period of time, she was capable of making contributions to an RRSP plan at the rate of about $85 every two weeks (which is roughly $184 per month).

24 In addition, I am of the view that the bankrupt had and will have, in my view, sufficient income with which to make some provision for her student loans. Her monthly budget filed in support of the application revealed net income of $2,153, which figure was arrived at by multiplying her net income (for a two week pay period) of $994.19 by 26 pay periods and dividing by 12. However, the bankrupt neglected to include in her net income the $184 deduction automatically made from her pay on account of her RRSP contribution. If one adds the $184 RRSP contribution and the $170 child tax credit to her income, the total net income is $2,507. Her stated expenses are $2,286. Thus, the excess income of $221 would be available to make some provision on account of her student loans.

25 Lastly, I note that she has about $4,500 in her RRSP that she could cash out and pay towards her student loans. She has failed to do so. She does not wish to do so. This is a liquid asset now available to her to pay down her student loan. She has also enjoyed income tax refunds of about $1,300 yearly. She has also enjoyed bonuses from her employer of a similar amount. These too could have been paid against the student loans. For these reasons, I do not think that the bankrupt has experienced financial difficulty to such an extent that she was unable to pay her student loans.

26 Even if I am wrong on this issue, I would also find against the bankrupt on the issue as to whether she would continue to experience financial difficulty to such an extent that she would be unable to pay her student loans. The bankrupt has been steadily employed for the past three years. She is now remunerated very well. She has demonstrated an ability to make contributions to an RRSP over the past 3 years. I believe her prospects at Hartford are positive. She is 38 years of age and remains employable for many years. She has taken 3 of 12 courses required to become a fully qualified underwriter. Given the bankrupt's age, current assets and income and future prospects, I am not satisfied that she will continue to experience financial difficulty such that she will be unable to pay her student loans.

27 I dismiss the application without costs.

Application dismissed.