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The Deviant Canadian Debtor

posted by Stephanie Ben-Ishai
The reforms we’ve discussed so far signal that a paradigm shift with respect to consumer bankruptcy in Canada is well under way.  A key component of consumer bankruptcy in Canada has, since 1919, been the non-waivable or mandatory consumer bankruptcy discharge.  In a similar, but more mediated fashion than our American neighbors, bankruptcy’s discharge of past debts that cannot be contracted out of has in recent times been regarded as part of economic rehabilitation, which is equated with a “fresh start.” However, the 1997 amendments attempted to effect a move from rehabilitation of the debtor to asking debtors to rehabilitate their debts by making payments out of surplus income.  The 1997 amendments required trustees to assess whether bankrupts could have made a viable consumer proposal and whether they cooperated with the trustee by meeting any surplus income requirements.

Despite the underlying assumption that many bankrupts have an ability to make repayments to creditors, in practice these amendments had a limited impact on the majority of bankrupts who could not make a proposal because they did not have surplus income.  Over a decade later, the current reforms will take the 1997 amendments further, as these reforms impact bankrupts with surplus income and also expand the group included in the paradigm shift to include certain debtors who do not have surplus income but owe tax debt or student loan debt to the government.  While the 1997 BIA amendments had limited practical impact, they signaled a return to the “deviant debtor” construct, which positions bankruptcy law as a response to deviant behavior.  The current reforms hold the potential to further entrench this construct in Canada’s consumer bankruptcy system.  The following are three examples.

(a)    Government Debts

The reforms soften the current student loan provisions in some respects, but leave the basic scheme untouched. In particular, the reforms do not remove the need for the debtor to make a costly discharge or relief application; the debtor may have limited access to assistance in handling the application; the statute provides little direction to the courts in the exercise of their discretion in hardship applications;  contrary to the Senate Report and PITF Report recommendations, there is no provision for partial relief; and most importantly, there is no empirically-based rationale for excepting student loans from the discharge. 

The introduction of a special discharge procedure for tax debts meets one criticism of the student loan provisions: previously student loans were the only form of government debt excepted from the discharge.  Now tax debts will also be excepted in certain circumstances.  However, this is where the consistency ends. A student loan debtor will be unable to apply for discharge of the debt until at least five years after ceasing to be a student, whereas a tax debtor can apply for a discharge as early as nine months after filing for bankruptcy.  In addition, the statute provides a specific list of factors to be taken into account at the tax debtor’s discharge hearing.  Furthermore, while an absolute discharge cannot be granted, a suspended or conditional discharge may be granted with some measure of partial relief.  Unlike the majority of student loan debtors, many tax debtors that fit within these provisions will have the resources to engage counsel to represent them at the discharge hearing and assist them in obtaining partial relief.

Taken together, the treatment of debts owed to the government push at the rehabilitation model of consumer bankruptcy without a clear or principled underpinning.  Historically, the small list of exceptions to the discharge in bankruptcy is consistent with the position that where the bankrupt acts in good faith, she is entitled to the discharge.  This is the case even where the bankruptcy is the result of poor financial decisions.  Accordingly, by excepting student loan debt and tax debt, the legislature characterizes bankrupts with this type of debt as deviant and dishonest.  Student loan debtors are the most deviant, while tax debtors deserve a symbolic slap on the wrist. By contrast, other bankrupts, such as those who owe fines imposed by a court and damage awards arising from civil proceedings other than for bodily harm, sexual assault, or wrongful death, remain entitled to have those debts discharged.  In addition, both measures run counter to the bankruptcy policy, in place since 1992, that the Crown should not be afforded special treatment in bankruptcy.

(b) The Collective Element of the Bankruptcy Process

In its purest form, the pari passu principle means that each creditor must be paid pro rata in accordance with the amount of her claim (“equity is equality”).  However, it has long been recognized that, in the Canadian context, equitable treatment does not always require equal treatment.  As Thomas Jackson has argued, bankruptcy rules should reflect the “creditors’ bargain” – essentially, different types of creditors have different arrangements with the debtor and this should be reflected in bankruptcy rules.  For example, secured creditors should be treated differently from unsecured creditors. 

The introduction of incentives for creditors to oppose a discharge runs counter to even a modified pari passu principle.  This may lead to private deals between the bankrupt and an opposing creditor.  Rather than encouraging creditors to cooperate with the bankruptcy trustee to maximize realization on the estate, creditors will be encouraged to withhold information until the discharge hearing.  At that point, the objecting creditors may disclose the information and seek an order that payment be made directly to them. On the other hand,  less powerful, involuntary creditors who are currently protected by the priority scheme (for example,  spousal support creditors) are likely to have fewer less resources available to them to participate in the discharge process and in certain instances they may not realize anything from the bankruptcy as a result.

(c) Judicial Discretion

Most consumer bankruptcy cases in Canada result in automatic discharge and there is no court hearing. Nevertheless, there are still a substantial number of debtors involved in hearings.  The reforms remove the need for a court hearing in the case of second-time bankrupts, impose a hearing on tax debtors, create an incentive and a more accessible vehicle for creditors to oppose a discharge (which will result in a discharge hearing), and retain the possibility for an application for relief from the exception to discharge for student loans.  It is unclear whether the reforms will result in a net increase or decrease in the number of court hearings.

In any event, in each of these instances, the court is instructed to use its judicial discretion in different ways, and different controls operate in the discharge process without clear policy rationales.  For example, in the case of student loan debt, the legislation gives the court very little guidance in the exercise of its discretion to grant relief.  By contrast, in the case of tax debt, the new provisions set out a detailed list of factors the court must consider in ruling on an application for a discharge.  For oppositions to discharge in all other instances, the court is given a list of factors on the basis of which it may refuse or suspend the discharge or impose conditions.  This list differs from the list provided for tax debtors. 

The reforms overlook a key issue, namely the role and form that dispute resolution should take with respect to the consumer bankruptcy discharge. More particularly, should the hearing continue to play a role in the discharge process, and if so, what principles should guide the process? 

For a more detailed account of these issues see:  “Means Measuring versus Means Testing Consumer Bankruptcy” in Stephanie Ben-Ishai and Tony Duggan, eds. Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute C.47 and Beyond (Toronto: LexisNexis Canada Inc., 2007).


The hyperlink at your previous post on Canadian bankruptcy overhaul (a neutral word as opposed to the more judgemental "reform") is invalid.

It appears it should be a .ca (Canada) instead of .com (commercial).

However, I cannot get the document to open, only to download.

Thanks for these informing posts.

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