Submissions to Government

The Honourable Senator Stratton,

Chairman Senate Standing Committee on National Finance

The Senate, Ottawa, ON

CANADA K1A 0A4

Dear Sir:

re: Bill C-36: clause 103, Survival of Student Loans in Bankruptcy

The Canadian Association of Insolvency and Restructuring Professionals is a professional organization representing the vast majority of insolvency practitioners and trustees in bankruptcy in Canada. Commencing September 1998, we are delivering, with the Superintendent of Bankruptcy, the National Insolvency Qualification Program, which is a joint program to train articling students who wish to become licensed as trustees in bankruptcy and to qualify for the CIRP, (Chartered Insolvency and Restructuring Professional) designation. Attached is a one page description of the Association.

We are asking that paragraph 103 of Bill C-36 be deleted on the grounds that:

1 an anti-abuse mechanism was just added to the Bankruptcy and Insolvency Act (BIA) September 30, 1997 and there is no real evidence as to its success or lack of success;

2 ad hoc tinkering with the BIA diminishes public confidence in the Canadian bankruptcy and insolvency system;

3 it may create genuine hardship for individuals and their families;

4 it can interfere with the rehabilitation of debtors;

5 it may further reduce the filing of consumer proposals without decreasing the number of bankruptcies;

6 repeat bankruptcies may be encouraged;

7 it may result in bankrupts with student loans not seeking their discharge in order to preserve the stay against enforcement, thereby potentially increasing the number of open estates;

8 it is contrary to the spirit of section 136 of the BIA, which was amended to put creditors on an equal footing and not to give debts to the Crown special status;

The Honourable Senator Stratton

Chairman, Senate Standing Committee on National Finance

We submit that the amendment of Subparagraph 178(1)(g)(ii) of the Bankruptcy and Insolvency Act (BIA) be removed from Bill C-36 (paragraph 103). This subparagraph only came into force in September 1997 and was an anti-abuse mechanism. The effect was that student loans could not be discharged in bankruptcy within the first two years of the bankrupt ceasing to be a full or part-time student. The 1997 amendments were the culmination of extensive hearings and consultation with stakeholders in the bankruptcy and insolvency system. We were greatly surprised to learn that the February budget suddenly proposed a ten year period. What proof is there that the 1997 amendment has failed and that ten years is the solution? We submit that as a matter of process, the effects of the new two year moratorium should be assessed before extending the period to ten. What is the rationale for the amendment? There are other ways to curb what may be perceived to be improper use of the bankruptcy and insolvency system. For example, abuses can be dealt with by Canada Student Loans filing an opposition to discharge as provided for in the BIA which it often did prior to November 1992 when the Crown was a preferred creditor. We believe that this measure could cause genuine hardship and suffering. Having to wait ten years puts their lives on hold before they can put an end to the collection efforts, re-establish their credit and get on with life. Former students' income levels may never allow them to repay their debts and thus such a provision is contrary to the rehabilitative objective of the BIA. One does not have to exercise very much imagination to picture the damage to mental health and family life. Our members' experience is that most bankrupts make every effort to pay their debts and will do so if able. By the time they seek the advice of a trustee in bankruptcy they have exhausted all of their resources. Often the prime reason for debtors declaring bankruptcy is to stop the harassment of creditors. We suggest that you will not find collection agencies opposing Bill C-36 since they will have an additional eight years in which to pursue the debtor.

This is not to suggest that there have not been debtors who try to abuse the system. However, government on one hand encourages citizens to obtain higher education and with the other appears to take drastic measures to punish them if the results do not provide the expected benefits (generating income levels sufficient to repay the loans). Are the consequences of not repaying student loans in full, appropriate penalties for taking on more debt than subsequent earnings can service? We submit that they appear to be far more severe than the "crime" warrants.

The Schwartz Anderson study ("An Empirical Study of Canadians Seeking Personal Bankruptcy Protection") conducted for Industry Canada and with assistance from CAIRP, reports on page 47 "Over the past decade, on the order

The Honourable Senator Stratton, Chairman

Senate Standing Committee on National Finance

of $20 billion dollars has been lent to hundreds of thousands of Canadian post-secondary students (Finnie and Schwartz 1996). Some of these borrowers were university students with relatively strong post-schooling prospects. A large proportion of student loans however, were issued to students enrolled in short-term courses whose vocational value was much less certain. Most importantly, however, student loans are issued without any assessment of the borrower's potential to repay; instead, they are based on student financial need. That practice may encourage post-secondary access, but it also leads to situations where some young people have relatively large debts with no means to repay them." It seems to us that the debtors are as much victims of government policies as scoundrels but they are the ones required to suffer the punishment.

Paragraph 103 has serious ramifications for the bankruptcy process and public confidence. The 1992 BIA contained significant amendments to further promote rehabilitation and recovery. Nowhere was this more evident than in the treatment of individual bankrupts. Counselling became mandatory for each person who filed for bankruptcy. New Directives under the Act have just come into force to encourage consumer proposals as an alternative to bankruptcy. We submit that paragraph 103 is in direct conflict with the objective of rehabilitating debtors.

Canada Student Loans will be encouraged to vote against all consumer proposals in order to retain the right to collect any amounts still owing on student loans after completion of a the proposal. If it does not vote against the proposal, the unpaid balance will not survive. Our members have reported that Human Resources Development Canada Collection Services uses a standard letter in all consumer proposals to file a negative vote and advise of its right to collect the debt under s. 178 of the BIA. Canada Student Loans would have no choice but to follow this procedure or the Auditor General would be taking it to task for giving up its legal rights.

Each month the release of the ever climbing bankruptcy statistics are met with distress and news articles expressing concern. Will paragraph 103 have any appreciable effect in decreasing the number of consumer bankruptcies? We submit that it will not. Desperate debtors with student loans may still file bankruptcy to obtain relief from the strain of their other debts. The number of bankruptcies may even increase because debtors will not be able to make consumer proposals and they will have to go bankrupt to discharge their other debts in order to maintain the required payments on their student loans. This amounts to a legislated change to disadvantage other creditors. The number of repeat bankrupts may increase as debtors repeat the bankruptcy process ten years down the road to discharge the unpaid balance of their student loans and interest, notwithstanding the relief provided by the amendments to the Canada Student Financial Assistance Act, (also contained in Bill C-36).

The Honourable Senator Stratton, Chairman

Senate Standing Committee on National Finance

The scheme of distribution in section 136 of the BIA was amended to remove priorities and preferences to the Crown. The insolvency community and the stakeholders represented on the Bankruptcy and Insolvency Advisory Committee (BIAC) strongly supported this change. Paragraph 103 realigns the priorities and negates the BIAC process, without consultation.

We are aware that the Budget also provided provisions for interest relief, extension of repayment periods, and, in some cases, debt reduction to assist students with the burden of debt. These provisions to ease the burden of student loans and at the same time improve the likelihood of repayment are laudable. Paragraph 103 is in direct contradiction to the spirit of these changes. It will not rehabilitate debtors. It will punish them. It will not increase fairness, but will give one creditor an advantage over another. It will not increase consumer proposals and decrease bankruptcies, but will have the opposite effect.

We would ask you to consider what this amendment will achieve. Tinkering with the BIA every six months does not instill confidence that our system is evolving under any particular vision or plan. A hasty decision may cause unforseen and unintended damage, not only to debtors but also to public confidence in the fairness and integrity of the Canadian bankruptcy and insolvency system. These sudden changes causes uncertainty, confusion and anxiety. We believe that better evidence should be available before enacting paragraph 103. At the very least, the effect of the two year requirement for student loans should be studied before making any further changes. Our Association has demonstrated its commitment to improve the bankruptcy and insolvency system and we are prepared to take the lead in conducting a study. The Report of the Special Senate Committee on Post-Secondary Education lends support to our opinion that this amendment should not proceed. Page 24 of the report says "There is almost universal concern that some students have already had to go too far into debt in order to obtain their post-secondary education. There is also evidence that the fear of accumulating an unmanageable debt is frightening off some students and preying on the minds of a large percentage of those with loans. Unfortunately, there is no up-to-date national statistical information about the ability of the average student to manage a large debt load after graduation, nor is there any information about what the maximum debt load should be."

We submit that deleting paragraph 103 from Bill C-136 now is a simple solution to avoiding a complex problem in the future.

Thank you for receiving our letter and for your consideration of our submissions.

Yours very truly,

Robert O. Sanderson, FCA, CIRP

Chair