Supreme Court of Canada Rules on Student Loan Discharge in Bankruptcy
The Supreme Court of Canada has handed down a landmark decision that clarifies how bankrupt individuals may discharge student loan debt. In a split ruling, the Court confirmed that the “single-date” approach is the correct legal standard for determining when borrowers can shed their student loan obligations under Canadian bankruptcy law. This decision brings consistency to a previously divided legal landscape, with significant implications for individuals struggling with student debt.
At the heart of the case was a debate over how to interpret Section 178(1)(g)(ii) of the *Bankruptcy and Insolvency Act* (BIA). Under this law, student loans are generally not dischargeable if bankruptcy occurs within seven years of the borrower ceasing to be a student. After seven years, the debt can be eliminated unless the individual qualifies for an earlier discharge due to financial hardship.
The legal dispute centered on two competing interpretations: the “single-date” and “multiple-date” approaches. The single-date method, adopted in provinces like British Columbia and Quebec, sets one critical date—the last day the individual was a student, regardless of whether the final period of study was funded by loans or personal resources. The seven-year countdown begins from this date.
In contrast, the multiple-date approach, used in Ontario and other provinces, allowed for multiple relevant dates tied to the completion of each loan-funded program. This method offered more flexibility, enabling borrowers to discharge certain loans earlier if more than seven years had passed since completing a specific program.
The Supreme Court ultimately sided with the single-date approach in a split decision. The case involved Izabela Piekut, who attended multiple university programs between 1987 and 2009. While her earlier studies were funded by government loans, her final program—a master’s degree—was self-financed. Piekut argued that the seven-year period should begin from her last loan-funded program in 2003, rather than her final studies in 2009. The Court rejected this argument, ruling that the relevant date is when she last ceased being a student, regardless of funding.
Writing for the majority, Justice Mahmud Jamal emphasized that the single-date approach aligns with the statute’s intent. He warned that the multiple-date method could lead to “absurdity,” such as allowing borrowers to discharge loans before the government had a chance to recover them, due to gaps in study periods.
The decision has far-reaching consequences. It establishes a uniform national standard, overriding the multiple-date approach used in some provinces. Borrowers must now wait at least seven years from their last day as a student—regardless of how their studies were funded—before seeking to discharge their student loans through bankruptcy or a consumer proposal.
While the ruling may seem restrictive, individuals still have options. Those facing financial hardship can apply for early discharge after five years if they demonstrate good faith and ongoing difficulty repaying their debts.
The Court’s decision aims to prevent “opportunistic bankruptcies” and ensure fairness in the system. However, it also underscores the challenges many Canadians face in managing student debt, raising broader questions about the sustainability of post-secondary funding and debt relief policies.
Background: Student Loans and Bankruptcy Law
Under Section 178(1)(g)(ii) of the *Bankruptcy and Insolvency Act* (BIA), individuals who file for bankruptcy are typically not released from student loan debts if the bankruptcy occurs within seven years after they cease to be a full- or part-time student. This seven-year period is designed to prevent borrowers from discharging their student loans too quickly, allowing the government time to recover its investments in post-secondary education. After the seven-year window, student loans can be discharged along with other debts. However, there is an exception: individuals may apply for early discharge after five years if they can demonstrate financial hardship and good faith in attempting to repay their debts.
The Legal Debate: Single-Date vs. Multiple-Date Approaches
The debate over the single-date and multiple-date approaches has been contentious. Courts in British Columbia and Quebec have consistently applied the single-date method, which sets one critical date: the last day the individual was a student, regardless of whether the final period of study was funded by loans or personal resources. From this date, the seven-year countdown begins.
In contrast, courts in Ontario, Newfoundland and Labrador, and other provinces have adopted the multiple-date approach. This method allows for multiple relevant dates, each corresponding to when a specific loan-funded program of study ended. For example, if a borrower completed one degree in 2003 and another in 2009, the seven-year period for each loan would begin from the completion of each respective program. This approach has been more flexible, enabling borrowers to discharge certain loans earlier if more than seven years had passed since completing a specific program.
The multiple-date method has been particularly beneficial for borrowers who pursued multiple degrees or took breaks between studies. For instance, if a borrower completed a bachelor’s degree in 2005 and a master’s degree in 2010, the seven-year period for the bachelor’s degree would expire in 2012, while the master’s degree would remain non-dischargeable until 2017. This approach allowed borrowers to shed older debts while still being responsible for more recent loans.
The Supreme Court’s Decision
The Supreme Court’s ruling in favor of the single-date approach has resolved this legal uncertainty. The case centered on Izabela Piekut, who attended multiple university programs between 1987 and 2009. While her earlier studies were funded by government loans, her final program—a master’s degree—was self-financed. Piekut argued that the seven-year period should begin from her last loan-funded program in 2003, rather than her final studies in 2009. The Court rejected this argument, affirming that the relevant date is when she last ceased being a student, regardless of how her studies were financed.
Because Piekut filed her consumer proposal in 2013, only four years after completing her master’s degree, she was not eligible to have her student loan debt discharged. The Court’s decision makes clear that the seven-year period applies universally, even if the final period of study was self-funded.
Justice Jamal for the Majority
Justice Mahmud Jamal, writing for the majority, emphasized that the single-date approach aligns with the statute’s purpose. He argued that the multiple-date method could lead to absurd outcomes, such as allowing borrowers to discharge loans before the government had a chance to recover them. For example, if a borrower took a short break between programs, the multiple-date approach could result in the discharge of older loans while the borrower was still pursuing further education. Jamal warned that this could undermine the integrity of the bankruptcy system and create opportunities for opportunistic bankruptcies.
Dissent
Justices Andromache Karakatsanis, Sheilah Martin, and Mary Moreau dissented in part, favoring the more flexible interpretation provided by the multiple-date approach. They argued that the single-date method could unfairly penalize borrowers who return to school multiple times, as each return would reset the seven-year clock. For example, a borrower who completes a degree in 2003, works for several years, and then returns to school in 2010 would have their seven-year period extended to 2017, even though their older loans were no longer being used for their education.
The dissenting justices contended that the multiple-date approach better reflects the realities of modern students, many of whom take non-traditional paths, such as pursuing part-time studies or taking breaks to work. They argued that the single-date method fails to account for the complexities of contemporary post-secondary education and could disproportionately harm borrowers who need flexibility in managing their debts.
Key Implications
The Supreme Court’s decision has several key implications:
1. **Consistency Across Provinces:** The ruling overrides the multiple-date approach previously used in Ontario, Newfoundland and Labrador, and other provinces, establishing a uniform national standard. This ensures that borrowers across Canada are subject to the same rules when seeking to discharge student loans through bankruptcy or consumer proposals.
2. **“Cease to Be a Student” Means Last Enrollment:** The relevant date for the seven-year period is always when the individual last ceased to be a full- or part-time student, regardless of whether their last period of study was loan-funded or self-financed. This means that borrowers who return to school multiple times will have their seven-year period extended each time they re-enroll.
3. **Purpose of the Law:** The majority’s decision aims to prevent “opportunistic bankruptcies” where individuals might strategically time their filings to discharge debts before the government can attempt recovery. The single-date approach ensures that borrowers cannot exploit gaps in their studies to shed their debts prematurely.
4. **Hardship Provision:** While the single-date approach imposes stricter timelines, individuals still have the option to apply for early discharge of student loan debt after five years if they can demonstrate good faith and ongoing financial hardship. This provision provides a safety net for borrowers facing exceptional circumstances, such as long-term unemployment or serious illness.
The Supreme Court’s decision has far-reaching consequences for borrowers and lenders alike. While it brings much-needed clarity to the law, it also highlights the challenges of managing student debt in an era of rising tuition fees and uncertain job markets. As the Court’s ruling takes effect, policymakers may need to reconsider how to balance the needs of borrowers with the financial interests of governments and lenders.
