October 3, 2012

Douglas P. Welbanks, the former Director of Debtor Assistance and Debt Collection in British Columbia, pointed out that the 1998 prohibition of student loan debts from being discharged from bankruptcy for 10 years muddied the statistical waters. This resulted in confusion over the true nature of the student debt crisis and masked the excessive hardship student loan debtors faced.

“Prior to 1998 our provincial statistics showed that 10% - 15% of our clients had student loan debts, were insolvent and qualified for a bankruptcy. One of the problems of perception or public understanding of the student loan debt crisis has been the meaning of bankruptcy and insolvency.

There is no sensation, no feeling of anxiety or fear greater than being broke and pursued by creditors, lawyers, government officials and/or bailiffs - except perhaps losing your credit rating. It is difficult to describe what it is like to get a collection call from someone who threatens you and your family with the seizure of household assets, the garnishment of your wages and/or the loss of your home. It is devastating.

And, before all of this happens, people have usually endured a lengthy period of borrowing (from Peter to pay Paul) such as using credit cards, lines of credit and often loans from relatives to meet the essential cost of living – rent, food and transportation. This process can last only for so long until either a solution to the financial shortages is found, like employment in a reasonably well-paying job, or creditor pressure pushes you to see a credit counsellor or bankruptcy trustee.

After the 10 year prohibition came into effect in 1998, the student loan debt casualties disappeared instantly from bankruptcy statistics. It took a number of years before they started reappearing on the radar screen of consumer debt problems. Later, and since the new millennium began in 2000, many student loan debtors were forced into a bankruptcy even though their biggest debt was a student loan debt – and that this debt would not be discharged by the bankruptcy. In other words, the major cause of their debt crisis would not be resolved.

It has become an acceptable practice for trustees, credit counsellors and other insolvency professionals to counsel their hopelessly insolvent debtors with sizeable student loan debts to go bankrupt to get rid of the charge card and other consumer debt. That way, their lives wouldn’t be so hopeless, even though they now had a bankruptcy registered against their credit rating (R9) and still had several years before retiring the student loan debt.

What was most troublesome for me was how student loan debtors were being deprived of a remedy available to all other consumer debtors because of the type of debt they had and not their conduct – such as fraud, reckless speculation, egregious or other irresponsible behaviour. And, they were being punished more severely than the fraudsters and felons.

I must add that this practice continues today – only the technical prohibition period has been reduced from 10 years to 7 years, while the debt levels and tuition fees are going up.

Finally, it is worthy of mention that student loan debtors who have a legitimate claim for a second chance through a bankruptcy proceeding are a complex social group that include people who suffer from a wide range of health problems, lone parent families, separated, widowed and divorced families, unemployed and underemployed individuals. An entire social class of individuals and families has been created since 1998 by a legislative amendment of parliament intended to insulate the crown (student loans) from its own bankruptcy legislation – which happens to be an integral part of the Canadian social justice system designed to guarantee fair and equal treatment for all citizens before the law.”

The 2012 Quebec student protest that contributed to the downfall of the Jean Charest Quebec government shows that many students are fed up and prepared to do something more than just complain about the high cost of post secondary education and how student loan debts strangle the hope of many to home ownership, a better life and a timely and uncontested bankruptcy discharge when necessary.