Question: Do private student loan creditors get an opportunity to overturn a Consumer Proposal, if they miss the prescribed 45-days mandated by the Bankruptcy and Insolvency Act? Answer: Apparently… Yes, because a debtor who receives a loan from a private lender is held to a higher standard of disclosure if the loan was for educational purposes.
By Cathy Chen, Licensed Insolvency Trustee
Earlier this year a debtor filed a Consumer Proposal with our office. He was a chiropractor with his own business. While in Chiropractic College, the debtor was offered a line of credit by a bank. He used it to complete his studies, but it’s important to note that even if this type of loan is used to finance education, it’s not governed by either the Canada Student Loan Act or the Canada Student Financial Assistance Act. In other words, a line of credit used like this is a private student loan. At the time of filing, the bank held 62% of the total claim. Also listed was a National Student Loans Service Centre loan in the amount of $53,123. This meant that over 91% of the debtor’s total debt was for education and/or student loans. The bank received a copy of the Consumer Proposal, but inadvertently missed performing any of the steps required to object to the proposal within the prescribed 45-day time period.
Consequently, the Administrator (who acts on behalf of the Office of the Superintendent of Bankruptcy Canada) did not receive any requests for a meeting of creditors from any party. Therefore the proposal was deemed accepted by creditors. However, within 15 days after the proposal was accepted the bank requested a Court review of the proposal. A review hearing by the Deputy Registrar approved the proposal for the following reasons:
- The Court could not grant the bank an extension of time to submit its proof of claim and vote on the proposal, and;
- The Registrar held that on the evidence before him, the proposal was fair and reasonable.
The bank decided to appeal to the Superior Court of Justice, where the approval of the proposal by the Deputy Registrar was set aside, because the Court did not have before it the following evidence that ought to have been put by the debtor before the Court::
- Whether the debtor believes his cash flow will improve
- Any indication as to his anticipated future earnings
- Whether any hardship or special circumstances have occurred which resulted in the debtor having to resort to the Business Insolvency Act (BIA)
- Whether the debtor was in default of his financial obligations at the time he made the proposal
- Whether the debtor has made any reasonable efforts to pay his debts prior to making the proposal.
In short, the Court recognized that a student loan raised different considerations than other types of loans, as it enabled the debtor to obtain an education, which is a long time enduring asset. It appears that if the Court reviews a consumer proposal comprised of mainly student loans, then the test is far more stringent than the basic “fair and reasonable” test that is applied in cases involving only consumer debts. Following the above decision, the debtor then sought leave to appeal the decision of the Superior Court. However, in December 2014 the motion was dismissed for the following reasons:
- Although government student loans and private student loans are treated differently under the post-1997 legislation, private student loans still enjoy a unique status relative to other types of loans
- As long as the BIA provides for the court approval process, parties who are unhappy with a proposal may ask the court to review it, not to try to get a “second kick at the can,” but rather to ensure that a proposal is fair and reasonable.
This case serves as a reminder that loans used for education purposes may get different consideration than other types of consumer debt, even if they don’t fall under Canada’s student loan acts (i.e. the Canada Student Loan Act or the Canada Student Financial Assistance Act).