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The funding for this report provided by the Office of the Superintendent in Bankruptcy is
gratefully acknowledged. This report is part of a 3 paper (report) series on comparative
consumer bankruptcy issues. The authors of the other 2 reports are Saul Schwartz and Iain
Ramsay. Comments have been provided on each of the reports by the other 2 authors and
the reference to “we” in this report and the others is to the 3 authors. The comments
provided on this report by Saul Schwartz and Iain Ramsay are gratefully acknowledged.
This report also benefited from the excellent research assistance provided by Elise Lenser.










Government Student Loans, Government Debts and Bankruptcy:

A Comparative Study













Stephanie Ben-Ishai
Assistant Professor

Osgoode Hall Law School
[email protected]

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TABLE OF CONTENTS

Executive Summary ......................................................................................................... 2
1. Canadian Context....................................................................................................... 5

A. Overview of Government Student Loans.............................................................. 5
B. Proposals and Reforms....................................................................................... 9

2. Measures Towards Convergence and Triggers .......................................................... 11
A. More Restrictive Discharge Provisions ............................................................. 11
B. Government Student Loans Not Provable.......................................................... 13
C. Perceived Abuses of the Bankruptcy System...................................................... 13
D. Increasing Number and Value of Student Loans ................................................ 15
E. Protecting the Public Interest: Recipient of Benefit Should Pay ......................... 16
F. Development of Securitization Markets ............................................................. 18

3. Recommendations and Issues for Further Consideration........................................... 20
A. Recommendations ............................................................................................ 20
i. Public Interest and Abuse Justifications for Exception are Unsubstantiated ........ 20
ii. Abolish the Exception................................................................................... 22
B. Issues for Further Consideration....................................................................... 24
i. The Provability of Government Student Loans................................................... 24
ii. The Treatment of Government Student Loans in a No-Asset Procedure.......... 24

4. New Zealand............................................................................................................ 25
A. Overview of the Government Student Loan Program.......................................... 25
B. Treatment of Student Loans in Bankruptcy........................................................ 26
C. Treatment of Student Loans in Alternative to Bankruptcy Processes ................... 27
D. Consumer Debts Not Extinguished by Bankruptcy............................................ 28

5. Australia.................................................................................................................. 29
A. Overview of the Government Student Loan Program.......................................... 29
B. Treatment of Student Loans in Bankruptcy........................................................ 31
C. Treatment of Student Loans in Alternative to Bankruptcy Processes ................... 32
D. Consumer Debts Not Extinguished by Bankruptcy............................................ 32

6. The United Kingdom............................................................................................... 35
A. Overview of the Government Student Loan Program.......................................... 35
B. Treatment of Student Loans in Bankruptcy........................................................ 36
C. Treatment of Student Loans in Alternative to Bankruptcy Processes ................... 37
D. Consumer Debts Not Extinguished by Bankruptcy............................................ 38

7. The United States..................................................................................................... 40
A. Overview of the Government Student Loan Program.......................................... 40
B. Treatment of Student Loans in Bankruptcy........................................................ 42
C. Treatment of Student Loans in Alternative to Bankruptcy Processes ................... 43
D. Consumer Debts Not Extinguished by Bankruptcy............................................ 44

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A second problem with the exception is that it places the burden of making decisions about
student hardship on bankruptcy registrars, without giving them any guidance on how to
make these decisions. Unlike the situation in jurisdictions such as Australia, where such
decisions are administrative decisions under the taxation scheme, bankruptcy registrars do
not have experience to draw on from other similar situations or a large body of precedent
for student loan decisions. No other exception to the bankruptcy discharge in Canada
provides for an exception to its application on good faith and financial hardship grounds.
For these reasons and because of the procedural and substantive obstacles to bringing an
application for relief, the current role played by bankruptcy registrars is ineffective. Given
both the American and the Canadian experience with applications for relief from the
exception, where decisions are inconsistent and limited relief is provided, a better approach
would be to place the onus on the government to oppose a former student’s discharge in
appropriate cases.

The approach we propose is essentially a return to the Canadian model that was in place
between 1992 and 1997. In 1992, the government’s preferred status in bankruptcy was
removed, consistent with a broader trend in other jurisdictions to limit the priority status of
the Crown.128 When the preference was taken away from the government, the government
argued that there was little to be gained from objecting to a bankrupt’s discharge, since it
had to share any recovery with the bankrupt’s other unsecured creditors. The government
claimed that it was experiencing significant losses as a result of its general unsecured
position and the increasing number of students who were going bankrupt with unpaid
Government Student Loans. As has already been discussed (Part 3(A)(i)), the empirical
data demonstrates that while default on student loans and bankruptcies may increase with an
increasing number and value of student loans, there is no empirical evidence of abuse of the
bankruptcy process. Accordingly, the solution is not to deal with the costs associated with
democratizing post-secondary education by closing the door to bankruptcy. Further, unlike
the situation prior to 1997, mandatory surplus income payments are now required for high-
income debtors during the 9-month bankruptcy period129 and Bill C-55, would extend that
period.130 Accordingly, while the government would have to share any recovery with other
unsecured creditors there is a possibility for greater recovery through income contributions
during the bankruptcy period, which for high-income debtors looks similar to lengthier
bankruptcy periods in Australia and New Zealand. Further, while this approach may result
in increased monitoring and litigation costs in relation to student loans, these costs would
presumably outweigh the costs of distress suffered by existing students who cannot
discharge their Government Student Loans.

As there were few cases between 1992 and 1997 where the government opposed a
bankrupt’s discharge on account of unpaid Government Students Loans, it is difficult to
evaluate the role that bankruptcy registrar’s played in that period in relation to student loans.
In order to avoid an unpredictable and inconsistent system, if the exception is abolished it
would be important for the government to issue a bulletin as to its policy and criteria for
opposing discharges on the ground of outstanding Government Student Loans.



128 For a broader discussion of this reform and the current status of the government in bankruptcy see Ben-
Ishai, supra note 122.
129 See An Act to Amend the Bankruptcy and Insolvency Act, the Companies Creditors’ Arrangement Act
and the Income Tax Act: S.C. 1997, c.12 and Office of the Superintendent of Bankruptcy Canada, Directive
No. 11: Surplus Income (Issued 30 October 2000 and revised 26 January 2005), online: Office of the
Superintendent of Bankruptcy <http://strategis.ic.gc.ca/epic/internet/inbsf- osb.nsf/en/br01055e.html>
(date accessed: 14 June 2005).
130 Bill C-55, supra note 40, s. 58.

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B. Issues for Further Consideration

i. The Provability of Government Student Loans

An issue that has not arisen in the Canadian context concerns the provability of Government
Student Loans. It is unclear from a review of both primary and secondary sources why this
issue has not arisen in the Canadian context. One possibility is that where Government
Student Loans are in a bankrupt’s portfolio of debts, the distribution from the bankrupt’s
estate to unsecured creditors is so low that the issue does not have much economic
significance. This possibility needs to be further investigated in the current context. The
rationale behind the approach in Australia and in the U.K. suggests that if the exception for
Government Student Loans is retained in Canada, they should not be provable in
bankruptcy. That is, since the government retains the prospect of repayment because
student loans are not extinguished in bankruptcy, it should not be able to claim a share of
the sale of the bankrupt’s assets, thereby reducing the amount available to other creditors
who have no future hope of repayment.

ii. The Treatment of Government Student Loans in a No-Asset Procedure

It may be argued that the summary administration process, currently in place under the BIA,
is Canada’s version of a no-asset bankruptcy procedure. However, this process still
includes a number of features that distinguish it from the proposed no-asset processes in
New Zealand and the U.K. One of the most significant of these features is the cost of
going bankrupt in Canada. To the extent that our second recommendation is adopted and
the exception to discharge for Government Student Loans is abolished, if a no-asset
procedure, similar to the U.K. or New Zealand model, is implemented in Canada, further
consideration will need to be given as to whether an exception to discharge for Government
Student Loans should be in place for this process.

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discharged from a debt of a kind specified in paragraph (2), (4), (6), or (15) of subsection
(a) of this section, unless, on request of the creditor to whom such debt is owed, and after
notice and a hearing, the court determines such debt to be excepted from discharge under
paragraph (2), (4), (6), or (15), as the case may be, of subsection (a) of this section.


(2) Paragraph (1) shall not apply in the case of a Federal depository institutions regulatory
agency seeking, in its capacity as conservator, receiver, or liquidating agent for an insured
depository institution, to recover a debt described in subsection (a)(2), (a)(4), (a)(6), or
(a)(11) owed to such institution by an institution-affiliated party unless the receiver,
conservator, or liquidating agent was appointed in time to reasonably comply, or for a
Federal depository institutions regulatory agency acting in its corporate capacity as a
successor to such receiver, conservator, or liquidating agent to reasonably comply, with
subsection (a)(3)(B) as a creditor of such institution-affiliated party with respect to such
debt.


(d) If a creditor requests a determination of dischargeability of a consumer debt under
subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment
in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if
the court finds that the position of the creditor was not substantially justified, except that the
court shall not award such costs and fees if special circumstances would make the award
unjust.


(e) Any institution-affiliated party of an insured depository institution shall be considered to
be acting in a fiduciary capacity with respect to the purposes of subsection (a)(4) or (11).

A broader discharge of debts is available to a debtor in a Chapter 13 proceeding than in
Chapter 7 proceeding. The following debts are not discharged in a Chapter 7 proceeding,
but can be included in a Chapter 13 plan.335

§ 1328. Discharge

(a) Subject to subsection (d), as soon as practicable after completion by the debtor of all
payments under the plan, unless the court approves a written waiver of discharge executed
by the debtor after the order for relief under this chapter [11 USCS §§ 1301 et seq.], the
court shall grant the debtor a discharge of all debts provided for by the plan or disallowed
under section 502 of this title [11 USCS § 502], except any debt--
(1) provided for under section 1322(b)(5) of this title [11 USCS § 1322(b)(5)];
(2) of the kind specified in paragraph (5), (8), or (9) of section 523(a) [or 523(a)(9)] of
this title [11 USCS § 523(a)]; or
(3) for restitution, or a criminal fine, included in a sentence on the debtor's conviction of a
crime.

(b) Subject to subsection (d), at any time after the confirmation of the plan and after notice
and a hearing, the court may grant a discharge to a debtor that has not completed payments
under the plan only if--
(1) the debtor's failure to complete such payments is due to circumstances for which the
debtor should not justly be held accountable;
(2) the value, as of the effective date of the plan, of property actually distributed under the
plan on account of each allowed unsecured claim is not less than the amount that would

335 13 U.S.C. ti t. 11 § 1328.

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have been paid on such claim if the estate of the debtor had been liquidated under chapter 7
of this title [11 USCS §§ 701 et seq.] on such date; and
(3) modification of the plan under section 1329 of this title [11 USCS § 1329] is not
practicable.

(c) A discharge granted under subsection (b) of this section discharges the debtor from all
unsecured debts provided for by the plan or disallowed under section 502 of this title [11
USCS § 502], except any debt--
(1) provided for under section 1322(b)(5) of this title [11 USCS § 1322(b)(5)]; or
(2) of a kind specified in section 523(a) of this title [11 USCS § 523(a)].

(d) Notwithstanding any other provision of this section, a discharge granted under this
section does not discharge the debtor from any debt based on an allowed claim filed under
section 1305(a)(2) of this title [11 USCS § 1305(a)(2)] if prior approval by the trustee of
the debtor's incurring such debt was practicable and was not obtained.

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