According to an Equifax Canada report from June 2017, Canadians carry $22,125 on average in non-mortgage debt. Especially in times of high interest rates and an increased cost of living, that number could very well rise until it becomes nearly insurmountable for the average Canadian.
Licensed insolvency trustees offer several solutions that help individuals and families through a debt crisis. One of them is bankruptcy.
In theory, bankruptcy sounds easy. But it’s much more than a matter of throwing your hands up and walking away from your debts. Bankruptcy filings carry significant credit consequences, and also involve many legal documents, costs, and possibly an appearance in court should your creditors contest your bankruptcy claim. This is called a bankruptcy discharge hearing, which is presided over by a bankruptcy judge.
Mary* found herself in a discharge hearing after her bankruptcy filing was contested by her student loan creditor. The judge’s ruling wasn’t exactly what she was expecting.
Bankruptcy Filing from Credit Card and Student Loan Debt
Mary was a 27-year-old single female with no dependants. She was earning $52,000 per year – a nice salary for someone her age. However, Mary was also paying $1,900 per month in rent, which was more than 50% of her net income. She also had $27,000 in credit card debt and an outstanding student loan of $23,000. To make matters worse, she hadn’t talked to her student loan creditor in more than six years.
To help her clear her debt picture, Mary found us online and visited our offices. We got to know her and did a complete review of her financial situation. During this review we spoke to the student loan creditor on her behalf, and learned that her student debt was actually $40,000 due to interest accruing. This brought her total debt load from $50,000 to $67,000, and growing.
Our team advised Mary that a consumer proposal was the best solution for her circumstances. This would entail making a modified offer of repayment to her creditors, which if accepted would allow her to make fixed monthly payments until she completes the terms of the proposal.
We also explained how bankruptcy works, and detailed all of the rights, responsibilities, and ramifications under it. After giving her as much information as possible so she could make an informed decision with confidence, Mary decided to file for bankruptcy.
Our trustees filed Mary’s bankruptcy, but unfortunately the student loan creditor opposed the claim. Their reasoning was based on the fact that Mary had not contacted them for years, and had never tried to arrange for or make a payment towards her student debt.
It’s important to remember that filing for bankruptcy isn’t a cut and dry solution. Filing simply means that you’re applying to the Court to be absolved or released from your debts. Your creditors have the right to request the Court actually review the matter, which is why Mary had to appear in a discharge hearing before a bankruptcy judge.
Attending a Bankruptcy Discharge Hearing
At a discharge hearing, the judge will review the opposition to the bankruptcy filing and render a decision on which type of four discharges will be granted:
- Absolute discharge: The bankruptcy filing is accepted, and the debtor is released from their obligation to repay eligible debts that existed at the time of the original filing
- Conditional discharge: The debtor must meet certain conditions that must be met before an absolute discharge is granted, including the payment of a certain amount of money over a specific period
- Suspended discharge: The absolute discharged will be granted, but at a later date
- Refused discharge: The Court refuses the bankruptcy filing, and the debtor is obligated to repay their debts
In Mary’s case, the Court focused on the fact that Mary had not spoken to her student loan creditor in six years. However, her overall financial picture was also taken into account, and so a conditional discharge was granted. In the end, Mary was ordered to pay $15,000 to get her absolute discharge and be released from her repayment obligations.
Repayment Efforts to Creditors Matter
The key factor in the judge’s decision was Mary’s lack of communication with her student loan creditor. In a bankruptcy, and especially in a discharge hearing, how you treat your creditors and what efforts you make to pay your debts play a large role in whether your filing will be granted.
Bankruptcy is a way to move past your debts when you can’t pay them. However, why you can’t pay the debt matters too. Bad things happen to good people, and bankruptcy is available to help give you a fresh start if you want to pay but simply can’t. But if your motivation for a bankruptcy filing is that you simply don’t want to pay your debts, then the process can become very difficult, and possibly work against you.
In short, credit is there to be used. Except for a few rare exceptions, it’s expected to be repaid. So if you don’t think you can pay it back, it’s best to avoid credit and look at some credit management plans instead. As always, I’m here to answer any questions.
Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.
For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped individuals, families, and businesses in Toronto move beyond debt towards financial health. Contact us today for a free consultation.
TIP: As soon as a student graduates, they should be making arrangements to repay student loans, and working those payments into their monthly budget. Public student loan assistance programs in Ontario don’t require students to start repayment until six months after graduation to allow them time to find work and settle into a routine. If you do find yourself short of funds when repayments come due, seek out one of the many student loan debt reduction, assistance, or forgiveness plans offered by the government.
*Not a real person, but this scenario is based on real cases