March 26, 1999

Bankruptcy bias

n

Are postsecondary graduates who file for bankruptcy being singled out to bear a potentially crushing burden - one that doesn't apply to other Canadians in a similar situation?

That's the question being asked by Annick Chénier and the Can-adian Federation of Students (CFS), as they prepare to challenge the 1998 provision in the Bankruptcy and Insolvency Act. The amendment no longer releases students from their school loans when they declare bankruptcy within 10 years of graduation.

With nine years of undergraduate and graduate degrees behind her, Chénier found repaying her $52,000 student loan ate up one-third of her take-home pay as a practicing psychotherapist. According to the CFS, that's not an unusual amount of debt for a graduate student. In comparison, the average full-time student debt for a four-year undergraduate degree in 1998 was $25,000.

The CFS says students are being denied the opportunity for a fresh start, one which protects the rights of other Canadian citizens. "We are arguing that former students affected by the legislation generally fall into a certain age category," says Elizabeth Carlyle, CFS national chair. "So for us, this legislation discriminates on the basis of age and on the status of being a student."

University of Alberta law professor, Morris Litman says: "There is no general rule that legislatures cannot discriminate, but the Charter of Rights prevents discrimination on the basis of age. Nothing in the bankruptcy act appears to discriminate on that basis." But students tend to be young, so an argument could be made the legislation is discriminatory.

Rod Wood is not so sure. The U of A law professor says an argument for a disproportionate effect on students is not easy to make. And while he agrees with Litman the government may have changed the regulations to ensure loans are repaid, he thinks there may be an additional reason. "It's unfair for people to borrow money, enhance their earnings capacity by virtue of their education, and then to declare bankruptcy and still have the advantage of that."

Carlyle stresses the federation is not suggesting all students declare bankruptcy. "Anyone with a car or other loan can declare bankruptcy, yet students investing in their future are told they cannot be relieved in a rough situation. A student who is an honest but unfortunate debtor - like any other Canadian - should be able to declare bankruptcy."

Understanding the rationale behind bankruptcy is "an important lens" to understanding this case, says Litman. Individual bankruptcy is a special process in which the proceeds from an individual's property are dispersed to pay creditors. "At the end of the day," explains Wood, "those debts that previously existed are discharged." You cannot free yourself from all obligations, but "bankruptcy is the recognition that having to bear this crushing burden forever is counterproductive," says Wood. It also reflects "the cause of bankruptcy may be loss of employment, divorce or bad luck and that it's not necessarily misconduct."

The CFS couldn't agree more. Carlyle cited poverty, high tuition fees and the high cost of education as contributing to a debt load high enough to push some students into bankruptcy. "Students have been forced into a situation of declaring bankruptcy in many cases because they are poor, " she says. "People aged 18-34 have seen their incomes decline by a remarkable 30 percent since 1986 and yet the federal government is saying 'you've got to pay off your loan - you've got no other option.'" Carlyle adds most people who declare bankruptcy cannot find employment, have other burdens, have done graduate studies or have chosen work "that is not terribly lucrative, but requires lots of training."

She laments the funding and program cutbacks as well as increases in student-loan limits. When the federal government raised the limit, "tuition fees increased partly because universities saw that more money was available to improve student loan programs." The increase in student-loan amounts arrived when the grants program was eliminated and when the federal government began major funding cuts. "These situations feed off one another," says Carlyle.

The CFS recognized there was a ground swell of concern about the recent provision when they received dozens of letters and calls from lawyers, legal-aid advisers, credit counsellors and students who are in "situations as bad or worse than Annick," says Carlyle.

The federal and provincial governments offer programs such as interest relief and debt remission to help reduce the burden for students with large debts. The provincially run remission program pays a portion of a student's loan after graduation. "Currently in Alberta, any loan debt of more than $5,000 per year is eligible," says Irene Spelliscy, the U of A's director of financial information. She is not surprised all eligible students do not apply for it. "It's not well advertised." They must apply within a year of graduating. However, Carlyle says government mechanisms such as these are overly restrictive, "and benefit so few students as to leave the vast majority with very few options."

Spelliscy has some advice for students to prevent huge debts while still in school: "There's a box at the end of the student loan form that remains blank if the student wants the full amount they're eligible for." There may be no choice but to leave it blank because of "a legitimate financial need," she adds. But if a student needs less, it helps to have less debt at graduation. "No matter how great your degree is, there's no freedom to a debt that will hang over your head for a long time."

Folio front page

Office of Public Affairs

University of Alberta