OTTAWA, Thursday, June 11, 1998

Mr. Robert A. Klotz, Chair, National Bankruptcy and Insolvency Section, Canadian Bar Association: 

Honourable senators, I am here to speak to you today only on one provision of Bill C-36, and that is clause 103.  That is the clause that extends the non-dischargeability period for student loans in bankruptcy from the current two years to a 10-year period.  My comments will first review the history of student loan treatment in bankruptcy.  Then I will address our process concerns and finally our substantive concerns.

With respect to the history and the current status, before April of 1998, two months ago, student loans were treated no differently than other debts in a bankruptcy. They were extinguished by bankruptcy.

There was some abuse, namely, the abuse of people who filed for bankruptcy when they really intended and planned to have substantial earnings and had no other outstanding debts.  Much of this abuse was caught by the discharge process in bankruptcy because when one files for bankruptcy, roughly nine months later, one comes up, if any creditors object, to a court hearing where a judge determines the conditions on which the person may exit the bankruptcy.

A judge could and still can order that the full debt be repaid if the debtor was manipulating the system.  There are many examples in the case law of student loan bankruptcies where the debt was ordered to be repaid in full or to some significant percentage exceeding 50 per cent.

The 1998 reform created a further disincentive to abuse.  Under the current law, student loans are excluded from bankruptcy relief -- that is to say, they are not discharged by the bankruptcy if the bankruptcy is filed within two years of the individual in question ceasing to be a full- or part-time student.

If the student does file within that two-year period, at the end of the two-year period, the student can apply to discharge the student loan if he or she can satisfy the court that he or she acted in good faith in filing the bankruptcy and will be unable to repay the loan due to financial difficulties that he or she has and will continue to experience.

Also in that 1998 reform is a mediation procedure when any creditor objects to the terms of discharge or wishes a term imposed on the discharge.

Under our current law, the student loan issue -- the abuse issue -- can now be addressed in three forums.

The first is the mediation forum where the student loan department can ask for a mediation in which to address its concern and strives to reach a consensual solution with the bankrupt debtor.

The second is through the discharge hearing where the student loan department, along with all of the creditors -- and perhaps in some of these cases there are no other significant creditors -- can attempt to persuade a judge that this bankruptcy was an abuse and that this debtor does not deserve the extinction of the loan because, after all, the future earning power was funded from the very education that was paid for through the loan.

The third anti-abuse mechanism under existing law is this two- year hiatus period.  If the bankruptcy is filed early, before the lapse of two years, the loan is not extinguished unless this hardship test can be overcome.  Under this current law, these three anti-abuse mechanisms are available.

Clause 103 of Bill C-36 proposes to extend this period from two years to 10 years.  If a student files for bankruptcy within, say, five years of his or her last part-time course, the student loan will not be extinguished. The student can only apply for special consideration to extinguish the loan after another five years has elapsed, so that a total of 10 years has elapsed from the last full- or part-time course.

If the student does not succeed at the hearing in getting the loan extinguished, the ex-student, at this point, would presumably have to file for bankruptcy again to extinguish it.

I will now comment on the process issues.

Our section of the Canadian Bar Association, the Bankruptcy and Insolvency Section, first learned of this provision of the bill in late May just days before it was passed by the House of Commons. We were surprised by this because of the extensive consultation process which underlay the bankruptcy reforms enacted in September 1997 and phased in as well in April 1998, to which I just referred.

The last round of bankruptcy reform was initiated in 1992 with the formation of the BIAC, the Bankruptcy and Insolvency Advisory Committee, which contained representatives of a broad cross-section of the insolvency and credit communities, as well as consumer groups.  The legislation that resulted from that consultation was vetted and commented upon by most of the interested parties.  That legislation provided for a further five-year review process, which is now underway.

By contrast, this amendment was passed in the other place with little or no consultation.  We were unable to express our views in the other place.  This is disturbing to us because one of the problems of the last round of reform was the lack of statistical data on which to base consumer bankruptcy reform.  Much of this lack applies to the student loan treatment in bankruptcy.

I would like to read some excerpts, if I may, from the Standing Senate Committee on Banking, Trade and Commerce report of Bill C-5, which was adopted by the full Senate.  It commented on a variety of points that are applicable today.  Unfortunately, I cannot cite page numbers because I am reading from the Internet version.

The report stated:
"Again, there is an implicit assumption that individuals are being manipulative, but there is little empirical evidence to substantiate this assumption.  One possible effect of this change may be that individuals will be discouraged from using bankruptcy.  The consequence of this will be creditors still unpaid, continuing problems of over indebtedness, stress and other social problems."

A few paragraphs later:
"Bill C-5 --"
-- which created the two-year non-dischargeability period --
"-- would make student loan debts non-dischargeable where a bankruptcy occurred within two years after the debtor ceased being a full- or part-time student.  Why should student loans be singled out for special treatment?  Is there evidence that students are using the bankruptcy system to avoid their loan obligations?"

This question was posed then, but it has not yet been answered.

Two paragraphs later:
"Government witnesses agreed that there is very limited data that would contribute to an understanding of consumer bankruptcy.  Industry Canada is currently financing a study that will profile debtors who have gone through the process of insolvency.  This study will provide some very preliminary information about consumer bankruptcy.  It will not, however, provide in-depth information needed for a comprehensive understanding of the causes and processes of consumer insolvency.  The Committee expects the Department to use the results of its "pilot" study to undertake the much-needed extensive study.  Such a comprehensive study, together with public debate, will be needed to permit a sound evaluation of public policy toward consumer bankruptcy.  The same will be required for student bankruptcies."

A few paragraphs further down, the document states:
"The Committee has already expressed its dissatisfaction with the process that culminated in Bill C-5.  It is equally dissatisfied with the general treatment of consumer bankruptcy.  It looks forward to a much more open consultation process in general for future amendments to the bankruptcy legislation and to a sound conceptual basis for the treatment of consumer bankruptcy, in particular.  The Committee will work with Industry Canada officials to design the comprehensive study of consumer bankruptcy."

We are here today without having had any consultation and with no statistical data, despite the Senate's very clear concerns.

In our view, it was inappropriate to make this change without data and consultation.

I would pose the question: Why is this particularly important?  In this regard, we can look to the U.S. experience.  To some extent, they have replicated, before us, the reforms that are being contemplated here.  Until 1976, the U.S. had the same treatment of student loans as we used to have -- that is, they were general debts. In 1976, they instituted a five-year hiatus period similar to our two- year hiatus period.  In 1991, they increased that to a seven-year period.  They have an exemption which a court may grant if undue hardship is proven.

This provision was recently the subject of an extensive review, along with the entire bankruptcy system in the United States.  They have produced a massive report of their national bankruptcy review commission, which was published on October 20, 1997.

Section 1.4.5 deals specifically with student loans and this precise issue.  This report recommended that these provisions be deleted.  The reason for that recommendation is germane to these process concerns that we have because it centres on the fact that, in this area, the reality is different from the pre-conception.  We have a pre-conception that there is much abuse and that there are students who are borrowing lots of money, then filing a manipulative bankruptcy to wipe out their debts and saying "Ha, ha."  There is no doubt that this does occur some time.  The question is: Does it occur much of the time and how should this be weighed? In this respect, the National Bankruptcy Review Commission commented at some length.  They said that the 1970 commission -- which was the foundation of the 1976 institution of this in their case five-year period -- acknowledged that student loan abuse was more perception than reality.

They quoted a general accounting office data finding that only a fraction of one per cent of all matured student loans were discharged in bankruptcy and that "bankruptcy filings constituted only 3 to 4 per cent of student loan losses -- a rate that compared favourably to the consumer credit industry over all.  When student loans were discharged in bankruptcy, that study found that debtors had also other significant indebtedness, leading to the conclusion that those filings represented genuine financial need, not from attempts to find an easy avenue to student debt relief."

I acknowledge that this is the U.S. experience.  It is not necessarily the Canadian experience.  However, it suggests that if the reality was so much different in the United States than the perception, that might be the case here in Canada.

The report continues:
"According to empirical data on cases in 1981, less than 7/10 of 1 per cent of total debt for wage earners in all consumer cases was for educational loans."

It then addresses the undue hardship provision by stating:
"The borrowers most likely to prevail in many courts --"
Here they are attempting to prove undue hardship and, therefore, to extinguish the student loan.  The report goes on to state:
"-- are those with the least possibility of being able to litigate the question.  The risk of losing is also high. Failure to meet the burden of proof leaves the debtor with the student loan debts and substantial litigation expenses.  As stated previously, the available evidence does not support the notion that the bankruptcy system was systematically abused when student loans were more easily dischargeable.  The fear that soon-to-be rich professionals would line up for bankruptcy to do away with their student loans remains a questionable proposition judging by earlier experiences when student loans were dischargeable and by long-term data of influence on bankruptcy filings."

Surely we must review our own data to determine these issues.  At the very least, in the U.S. they had their data. They could make an informed decision.  Clearly, there was some abuse and something has to be done about it.  However, is what we have -- which is only two months old -- sufficient?  If it is not sufficient, how severe must our response be without doing injustice to the innocents, namely, the good faith parties, the impoverished and the unemployed.

This must be addressed soberly.

The report continues:
"The GAO reported the following defaulter characteristics:  they had attended vocational or trade school; they had low incomes, with five studies finding that the majority of defaulters had incomes of $10,000 or less; the borrowers were unemployed at the time of default; they had borrowed small amounts; they had little or no financial support from others; many had minority backgrounds; some lacked high school diplomas; many did not complete the program for which they had obtained the student loans, often attending for one year or less."  There is more.

In view of the Senate's report on Bill C-5 and the comments made in the National Bankruptcy Review Commission, it is inappropriate to make this change from two years to ten years without data and consultation.

Perception may vastly differ from reality.  The truth is, we do not know in Canada.  That is why we have the five-year review that we thought we were in.  That is why the Senate report stressed the need for this.

Finally, the issues raised by a ten-year hiatus period are quite different from those raised by a mere two-year hiatus period, which was the subject of the extensive consultation.  This takes me to the substantive concerns. These concerns will not be exhaustive.  There are five concerns which I should like to note.

First, the bill discourages unemployed people from taking retraining courses or going back to school, even if they fund themselves.  If they do this while they have an outstanding student loan, they will restart the ten-year hiatus period. They will then have to wait 10 years not from their last schooling but from their fresh schooling in order to take some remedy under the Bankruptcy Act.  This is not an issue that arose in respect of the two-year period because no one is too concerned about someone waiting two years after they finish school to go back for retraining; it is not a hardship.  In the case of 10 years, however, I would not think it is unreasonable for someone to want retraining if there is training within their community within that 10-year period.  Should we not be encouraging that rather than discouraging it?

Second, the bill presumes by its structure -- and, appropriately so -- that there are some people who act in good faith and who have no ability to repay their student loan now or in the future and that, for some people, it is appropriate for them to file for bankruptcy.  That is why there is this clause providing for a court review after 10 years to determine if that is the case.  As passed in the other place, this issue can only be determined after 10 years has passed from the last full-time or part-time course.  This keeps the honest, good-faith debtors in purgatory, without possibility of consideration of their good faith until many years later.  Why do we have the same 10-year period for this court determination of mercy as we do for the hiatus period for student loans being discharged generally?  There is no reason for it.  Under a two-year hiatus, fine; the issue does not arise.  It is not a hardship to wait two years.  It is appropriate to wait some period of time after your education is complete before someone finds a job, but when you expand 2 years to 10 years, why force someone to wait 10 years to show that they are in good faith, to show that they are impoverished, to show that they cannot afford to put food on the table for their children?

It means that there will be two hearings for these people:  One for the general creditors, including student loans, when they get discharged from their bankruptcy; and the second at the end of the 10 years only for student loans.

In the U.S., these two hearings are done at the same time.  They do not require that there be a seven-year gap for this hearing.  After all, the debtor is bankrupt.  Why force a bankrupt debtor to have two hearings?  There is no reason for 10 years.  This provision, if it is appropriate, can quite easily be set at two years or five years.

The third concern is that this provision encourages a double bankruptcy.  I might indicate to the honourable senators that one of the thrusts of bankruptcy reform is to try and prevent recidivism in bankruptcy.  That is why the 1992 reforms brought in debtor counseling so people could manage their money and avoid coming back and overburdening the system.  If they have been unfortunate due to their own fault the first time, they will learn tools to help avoid these problems the second time.  This reform encourages the double bankruptcy; the first to take care of their creditors generally, and the second to deal with the one that gets through the net, that is student loans.

Fourth, our concern is that this amendment will encourage students or ex-students caught in this predicament into joining the underground economy, contrary to the goal of rehabilitation of debtors as productive members of society.  This is one of the goals of bankruptcy law.  Unless you have a bankruptcy system, you get people working under the table, making their income and keeping it from their creditors.   We use tax income that way and we develop a sense of losses that way.  I am not saying this problem is widespread but it is something that legislation should discourage and it is something at which bankruptcy is aimed.  This amendment might encourage that.

Most Canadians, therefore, most bankrupts, are honest.  Is this the appropriate way to weed out the bad apples with the residual unfairness and penalty being placed against all those people, who are acting in good faith or not, caught in this predicament?  We just do not know that that is the case, that this is the proper balance.

In conclusion, we recognize the government's intention in extending the two-year period to ten years, and that intention is to prevent abuse of the system.  We agree that abuse must be prevented.  We question whether this period, the extension from two to ten years, is the correct way to balance the problem of abuse inflicted by some against the injustice to many.  We do not have the data to assess this and we are concerned that this current approach is like using a sledgehammer when, perhaps, a fly swatter might do.

The Chairman:  You are aware that one of the major banks has withdrawn from the student loans program, which is my understanding?

Mr. Klotz:  I am not certain, that may be.

The Chairman:  I ran into two board members, we gave them a hard time about it, but that is my understanding.

Senator Bolduc:  You have written to the minister on May 27.

Mr. Klotz:  Yes.

Senator Bolduc:  You explained the main thrust of your point of view.  Did you have any answer to that correspondence?

Mr. Klotz:  No, we have not.  We did not anticipate an answer prior to this hearing.

Senator Bolduc:  The case is overwhelming and you are the specialist on the situation in the Canadian bar and also all the insolvency practitioners association.  We have here a whole file of people and we will hear some of them later.  They all say we should get off that section of the law.

Mr. Klotz:  Yes.

Senator Bolduc:  You did not get any answer from the minister.

Mr. Klotz:  If I may make one comment about the letter.  The letter was written fairly promptly after we learned of this and there was a very quick pace.  There is one anomaly in the letter because we understood that the two-year period in the last round of legislation corresponded to the two-year hiatus normally granted to student borrowers.  I have read the minister's speech in the other place when he introduced this legislation.  He indicates that the extension of the hiatus period to 10 years is intended to complement to some extent new and more lenient treatment of student borrowers and interest provisions on student loans.  I understand the intention of the government is to make borrowing more lenient but, at the same time, to have a hammer for those who abuse it.  I can appreciate that.

On the other hand, I still stand by my comments that it has not been established with data and it may not have been thought out in its details.

Senator Bolduc:  The intention of the minister to be more human with the students has not materialized in any formal way?

Mr. Klotz:  I have not seen that in Bill C-36.  I do note that in clause 99 there are provisions to prescribe circumstances in which a loan may be denied or an interest-free period may be terminated.  I read that as part of the minister's intention to somehow change the system so as to allow more leniency.  On the other hand, that is not a statutory matter, that is discretionary, and we do often have the scenario -- perhaps the representatives of the insolvency practitioners could speak to this with more assurance than I have -- we do have the scenario of individuals who, indeed, are in a bad way and yet cannot convince a particular collection officer in student loans that he or she is in good faith. There needs to be a remedy for that in our view for those cases where an injustice is being sustained.

The Chairman:  The parliamentary secretary was here and he said there is a forgiveness of interest of up to five years.

Senator Joyal, would you like to respond?

Senator Joyal:  I will touch on that issue, but I did not wish to interrupt Senator Bolduc's line of questions.

The Chairman:  I would like that brought out.

Senator Joyal:  I will return to that issue.

Senator Bryden:  Some of this may address the issue which you just raised, Mr. Chairman.  The background, at least as provided in the materials that we received from the department, indicated that part of the reason for the concern is that over the last five years bankruptcies have risen an average of 38 per cent per year while the loans have only risen by 14 per cent.  There is a dramatic disproportion in the bankruptcies.

Just to put it in context, in 1996-97, bankruptcies of student loans cost the Canadian taxpayer $105 million.  It is not pocket change that we are talking about here, these are real.

The point that I will make, as a result of what this bill is intended to implement, everyone who pays federal or provincial student loans will now receive a tax credit for interest that they pay each year, whether it is federal student loans or provincial student loans.  Those with financial difficulty will receive extended interest relief and an extended amortization period.  If it is still a hardship, a reduction in the loan amount after five years.  Their comment is that that reduction would be a reduction so that payments would be no more than 15 per cent of the person's earned income.

The department's position is that these new provisions -- and do I not wish to go into detail -- are intended as an alternative to bankruptcy for the students.  Therefore, their position is that it is only unfair, having tried to deal with the specific situation, to then exempt them from the overall opportunity to benefit from two remedies instead of the specific.

I wonder if you would comment.

Mr. Klotz:  This is the point I was trying to address when I commented on my letter.  My letter does not comment on the ten-year period, or on the extended relief, and the reason was I did not see it in the legislation.  The fact that it is not in the legislation gives me some concern because policies can change at the same time as legislation.  However, policies can change easier without legislation.  Our concern is that we now have a 10-year period locked in.  What if the student loan policy changes?  What if the attitude of the collectors change?  What if there is a cut back in the exercise of discretion by fiat in a department?  The legislation is locked in, and the inability to have a review to show good faith is not there until the 10 years has elapsed.

I agree fully with the approach that if bankruptcy ought not to occur because of lenient collection procedures and mercy shown by the student loan department itself, then bankruptcy would be abused.  That can be caught under existing legislation, as well as under what is being proposed.  It can be caught at the discharge hearing generally.

It is my concern that, first, the policy may change; and, second, that the person who needs the benefit of the exemption created by this section cannot obtain recourse to it until the 10 years has elapsed.

I mentioned an example like this in the letter.  It was about someone who goes into business and the business fails. This is the kind of person for whom bankruptcy relief is designed to help.  If that person has a student loan, the issue of whether bankruptcy is appropriate for all the other reasons is not addressed until the 10 years has gone by. There is no need for that.

Senator Bryden:  I am interested in your comment that two years is okay.  You then said that five years, perhaps, would be no problem.  However, you say that 10 years is a problem.

Mr. Klotz:  I am speaking specifically, senator, about the delay before one can apply for some kind of exercise of mercy by the court.  There are two periods, in effect, with which we are dealing.  One is the hiatus us period for discharge; the other is the time you have to wait before applying for mercy.

Senator Bryden:  Or applying for bankruptcy.

Mr. Klotz:  Let me backtrack for a moment.  Perhaps I have not made myself clear.
If you file for bankruptcy within that 10-year period, then the student loan is not wiped out.  However, at some point you are entitled to apply for special mercy for student loan relief -- in effect, mercy to the bankruptcy court. There is a test set out in the legislation.  It is not in Bill C-103.  It states that the court must be satisfied that the bankrupt has acted in good faith in connection with the bankrupt's liabilities under the loan; and that the bankrupt has and will continue to experience financial difficulties to such an extent that the bankrupt will be unable to pay the liabilities under the loan.  That court determination can only be requested under this amendment 10 years after the last class, so to speak.

When I said two years is fine and five years I can understand, I was referring specifically to the time period that must elapse before someone can apply for that exercise of student loan mercy from the bankruptcy court.  That is to say, you could have a 10-year hiatus period for dischargeability of the loan and, at the same time, a lesser period for the right to apply for relief from it under the bankruptcy legislation. I do not think those two must be connected.  They were connected as two and two in the original legislation which is now two months old.

Now that one is going up to 10, the other does not need to go up to ten.  It is not necessary.  Nor, in my view, is it appropriate.

Senator Bryden:  The point I am making is this.  If five is better, then would six get under the wire?  It is a matter of your judgment.  In your judgment, what you are saying is it could be a shorter period than 10 years for this purpose.  Obviously, government policy has determined that in its judgment they need 10 years.  At this stage, it is a difference of opinion as to that period of time.

Mr. Klotz:  I recognize this as a political question, provided that the matter has been fairly considered in its ramifications.  Yes, it is clearly a decision that is within the prerogative of the other place and of government policy.

Senator Bryden:  I am concerned somewhat about your position that a person would make a determination whether to continue with their education or not based on when they can make this application.

Mr. Klotz:  Yes.  It seems to me it works two ways. First, they might have regard to that issue when deciding whether or not to take the class, or when to take the place. Second, if they do take the class, they will find that they are penalized for it for the next 10 years.  Whether they change their conduct in advance or whether they are simply penalized afterward is really two sides of the same problem.

Why should they be penalized afterward, even if they did not realize beforehand that they should change their conduct?

Senator Bryden:  As I read carefully the bill, the budget provisions in the speech and the notes that were provided to us to help us understand it, clearly, the intention is a targeted situation to deal with two things. The first is to try to screen out obvious difficult situations at the beginning.

By the way, I think there was a recommendation in a letter, perhaps one of yours, that that should be done.  That is to say, people should go through some kind of credit check before they obtain a student loan. Currently, under the law, if you need it, then you get it.  It does not matter if you have never paid back a debt in your life.  That is being addressed to some extent in this bill.

The other issue is the ability not only to adjust interest rates but, in fact, to eliminate them for up to that 10-year period.  The government can gratuitously, or voluntarily, reduce the amount of principal of the loan, certainly down to what would amount to 15 per cent of the person's income.  This seems to be the manner in which they are attempting to target a specific situation which is student loans and the hardships that may arise as opposed to running them into the real world of the bankrupt and insolvent business.

I suppose I understand where you are coming from.  I just wanted to make it clear that this is not because government policy is not sensitive to the issue or to the students' concerns.  It may be wrong-headed.

However, after consultation with the provinces in relation to student loans, this is what they have come up with as a solution.  We must then judge between your situation and what the government has come up with.

Mr. Klotz:  I agree that the context of your comment is generally correct.  I agree that the intention is a fair and appropriate one.  The concern we are addressing is simply whether it is a wise.  As well, why could there not have been both consultation and data available before making what may be a very wise decision if, indeed, this decision is the correct one?

Le sénateur Joyal:  Je voudrais revenir sur cette question des chiffres auxquels vous faites référence.  Est-ce que vous avez contacté les responsables de l'administration des programmes de prêts aux étudiants pour savoir quels sont les montants d'endettement des étudiants versus la question de la faillite?  Vous dites qu'il n'y pas de chiffres, par contre mon collègue en a mentionné quelques-uns.  Il y a certainement quelqu'un dans le système d'administration des prêts aux étudiants qui tient des comptes sur ceux qui ne paient pas et ceux qui sont en pétition de faillite, et cetera.  Je ne pense pas que, compte tenu de la facilité avec laquelle on peut informatiser tout cela aujourd'hui, il n'y ait pas de chiffres nulle part.

Je trouve un petit peu global votre affirmation à l'effet qu'il n'y ait pas de statistiques.  À mon avis, il doit y en avoir.  Je suis convaincu de cela puisqu'ici le ministère des Finances nous donne un chiffre montrant qu'il y a eu une augmentation raisonnable de pétitions de faillite depuis les dernières années.
Je suis un peu perplexe devant une affirmation aussi absolue qu'il n'y a pas de statistiques.  Peut-être qu'il y en a qui ne sont pas suffisantes, mais d'affirmer qu'il n'y a pas de statistiques, j'ai  de la difficulté à accepter cette affirmation.

Mr. Klotz:  I am not the only one who says this.  The Senate, in its report on Bill C-5, also made that statement after hearing witnesses and having extensive briefing from the government.  I have reviewed the provisions of that report.  Statistics have not been invented since 1997.  They were invented before then.  Presumably, if those statistics were available, they would have been presented to the Senate before it made a report saying there are no statistics.  The government witnesses conceded this.

Le sénateur Joyal:  En d'autres mots, vous avez pris une affirmation dans un rapport et vous l'avez fait vôtre, mais vous-même, vous n'avez pas fait de démarches pour essayer d'obtenir des statistiques?

That is what I want to get from you.  You read a report and concluded from it that this conclusion is still valid today.  You did not, on your own initiative, contact any responsible people in the administration of the loans program to learn whether there are more statistics now than there were two or three years ago.  Am I correct in stating that?

Mr. Klotz:  No, senator, in my view you are not.  Since we learned of this amendment in late May, we have scrambled to learn where it was in the political process, to try to get consensus among our membership across the country on what approach we should take on this topic, to put together a letter to the minister to address our concerns, and to study it in as much detail as possible.

I have personally maintained my contacts with the ministry of industry and particularly the office of the superintendent of bankruptcies.  I have reviewed everything posted on their website.  They have a general study with some comments which I have reviewed that does not focus on the student loan issues.  I am quite interested in this area. However, I had no idea, until approximately two weeks ago, that this matter that was coming up now.

We have that review process built in.  We are involved in designing that process.  We want to be involved in the studies that are being designed.

On behalf of the Canadian Bar Association, I have written to the Minister of Industry indicating our intention to be involved in these issues and the design of them.  We were advised that these matters were underway; we were not advised that they had reached the process of legislation in the house.

Perhaps I can be faulted for appearing before you without having, within the past 14 days or so, contacted the student loan department.  On the other hand, I have not been inactive, senator.  I have done what I felt was appropriate, and what I could, to address what I considered to be an emergency.

Senator Joyal:  I understand that.  I do not wish to be harsh with you.  I am only trying to find out where the figures may be found in order that we can get them if we decide to pursue the matter further.

Some witnesses who appeared before us have said that this provision could be an infringement upon the Charter of Rights because it would create different classes of citizens. Section 15 of the Charter provides for equality of law and, as a result of this provision, some citizens would benefit from the Bankruptcy Act and some would not.

I understand that the principle at stake is the same for two years as for five years.  It is not an issue of lengthening or shortening the period.  The principle is whether there is a distinction that would withstand the test of the courts.

I understand that in the United States where there is, of course, a constitutional right to equality before the law, this distinction has existed since approximately 1976 and that we have had it since Bill C-5.

The first question of the bar must always be whether proposed legislation meets the test of the Charter.  Did you review this issue in that light?

Mr. Klotz:  If I may, I will first respond to the previous question and complete the comments I wished to make.

You asked about statistics.  I do not know what statistics you have been given.  For example, do they include a study of how student loan discharges have fared at the discharge hearing under our current law?  That statistic would disclose whether that anti-abuse mechanism is sufficiently effective.

Do those statistics show how the new two-year hiatus period is working in practice?  I suggest that they do not because no bankruptcy discharges have come up in those two months.  It will take at least nine months from the first bankruptcy filing after April 30 for that issue to come up. There cannot be any statistics on that issue yet; not even any anecdotes.

Do those statistics give a profile of the student loan filer to ascertain whether the vast majority are honest debtors and to quantify in some way the proportion of those who abuse the system and get away with it?

I keep in touch with the statistics and the studies as best I can.  I do not claim to have all the studies.  I certainly do not have the government studies.  However, I do my best.

I have not seen those statistics and I do not think they can have come into existence since the Senate dealt with this because that is what the five-year review process was for.

Perhaps I am a bit stung at the suggestion that I have not done my homework, but in certain of these areas the homework cannot have yet been done.

In terms of the constitutional aspects, yes, the Constitution is at the forefront, although not usually in bankruptcy matters.  I have not investigated this question and am not in a position to comment on it.  I would leave that to a constitutional scholar or a constitutional lawyer, which I am not.

Senator Joyal:  You referred to the American experience.  Are you aware of whether there exists in the American system a provision similar to the one we would have if this legislation is implemented; that being that a person could apply for an exemption of interest payments for up to five years?

Mr. Klotz:  I am not aware of that.  However, I will speculate for a moment.  Knowing the political process in the United States, at least from afar, it is likely that, in order to sell the five- or seven-year grace period, it would have been tied in with some form of measure to give relief. However, I do not know that for a fact.

Senator Joyal:  Do you know whether there is a provision in the U.S. system similar to clause 99 of this bill which provides for a review of the overall amount of debt so that a person can still get fair consideration on the basis of his or her capacity to pay so that the overall debt could be reduced according to financial situation?

Mr. Klotz:  I cannot answer that one way or the other.

Senator Joyal:  I understand that you recognize the importance of the principle of establishing a period during which a person cannot be relieved of the responsibility of repaying a student loan.

In recent years in Canada, and particularly through the last recession, there was an overall increase of petitions for bankruptcy in Canada.  There was an increase in that even in the last month, if the statistics I heard are correct.

I do not wish to be harsh on students.  In fact, the overall thrust of this bill is to help them.  However, having been a student myself, I know that the story could circulate among students that when you finish university you can file for bankruptcy, wipe your slate clean, and start again.

This is certainly an issue which the legislation wishes to address because of the overall increase of petitions for bankruptcy in society.  It is a trend and that trend is not always justified by economic conditions although a large number of students still cannot find jobs when they graduate.  That is a reality recognized by everyone.  The government tries to address that. It certainly is an aspect of reality which must be addressed in a fair and reasonable way for the taxpayer because, at the end, the taxpayer pays the $100 million increase in payments.  It is not taken out of any other purse.  Money which does not go into the system cannot be given back to the provinces to enrich other programs or to support the education system.  There is a net loss there.

This is part of the government responsibility.  It must be addressed in some way so that the system can be improved.  The money should be used for the real objective of improving education in Canada in terms of quality and access.  We cannot simply leave an easy way for students to get out of their responsibility by filing a bankruptcy petition.  This is a very important issue as such.

Mr. Klotz:  You must ask about the cause of the non-payment of someone who is bankrupt.  Why do they not pay their student loan?  Is it because of the bankruptcy or is it because they have lost their job and are unemployed?  When we look at the amount of money which is being lost through bankruptcy, is that entirely or substantially the fault of the bankruptcy system, or is it perhaps a reflection of unemployment in various areas of Canada?

Senator Lavoie-Roux:  Is it because they do not have a job?

Mr. Klotz:  The system does not necessarily give rise to that and changing this rule will not necessarily change that.  There will still be unemployed people.  There will still be people who are not paying.  That is the reality that I see.

Second, one statistic mentioned was the 38 per cent rise in bankruptcies and the 14 per cent rise in student loans.  I have reviewed studies that look at that rise in bankruptcies.  It is not just 38 per cent in one year.

There has been a steady increase.  They have contrasted that with the increase in consumer credit generally, through credit card, bank loans and so on, and found a very significant correlation between the two.

In other words, bankruptcies are still at the same level where they have always been in relation to the amount of credit that people are using.  The fact is that, as a social reality, Canadian citizens are generally using more credit and, as a result, they are utilizing their bankruptcy relief more often.

The interesting statistic is that student loans -- and I am fresh to this statistic -- do not appear to have increased in the same way that consumer credit has.  That would suggest better lending policies which have been exercised by the student loan people.

They are not having as much bad credit as credit card lenders and banks.  That is a good thing and an appropriate thing.  That would mean a retrenchment from the undisciplined lending which has been described where no credit check is made, to a more disciplined lending process with credit checks made before the advancing of student loans.

I am advised that a 38 per cent increase is consistent with the increase in credit and that the 14 per cent is good.  I am delighted that it is has only increased by 14 per cent when general borrowing has increased by so much more.  Perhaps it means that student loans are not that available and many people are borrowing from other sources to compensate for the lack of student loan availability.  I do not know but I do not think it necessarily answers the need for statistics.

Senator Beaudoin:  The question asked by my colleague Senator Joyal has piqued my curiosity.  Under the Bankruptcy Act, the application of the Charter of Rights does not give rise to many cases.  Of course, everyone is equal under the law and the law applies in the same manner to each person or class of persons.  However, there may be some exceptions.  There is no case, you say, about bankruptcy?  The jurisprudence is very thin?  Is that the case?

Mr. Klotz:  That is the case.  Let me start by saying I would be delighted to have a constitutional case in bankruptcy and I have been looking for one for a long time.

Senator Beaudoin:  I understand your interest.

Mr. Klotz:  I would be delighted.  In my experience, speaking more personally from my bankruptcy practice, the issue has only come up twice in theory.

The first had to do with court delays in getting a discharge hearing.  At one point it was 15 months in Toronto Bankruptcy Court and the idea was floated about that perhaps this was a deprival of due process, just like the Ascov decision in getting a criminal case heard.  That was a bit subtle.

There is an impending constitutional issue coming up in the definition of spouse in the Bankruptcy and Insolvency Act.  It is undefined.  It probably means "married spouse" and perhaps you are familiar with the headlines about cases which say that restricting rights to married spouses is unconstitutional and so on because of the deprival of rights on the basis of sexual orientation.  That is another of the constitutional issues.

Generally, bankruptcy is a business statute.  It is primarily concerned with property which is not protected in quite the same way by the Charter of Rights.

Senator Beaudoin:  Would you say that the application is always uniform?

Mr. Klotz:  The application of what?

Senator Beaudoin:  Of the law, equality before the law.  The students are in a very different category in a sense.  However, they are subject to the same laws.

We do have examples in our legislation where the application of a statute is not exactly the same for everyone.  This is the case for the Young Offenders Act and other categories such as that.  In the field of students and loans to students, I am not aware of any different applications except perhaps for this question of bankruptcy for ten years.  It is obvious that the application of the law is not the same in that case for students as it is for the other people.

Mr. Klotz:  I agree there is a distinction.  As to whether that is constitutionally permissible, I am not the person to ask, senator, because I do not know.  Anything I say would be speculation.

Senator Beaudoin:  According to the figures I have seen, the students represent 3 per cent and the other people represent about 6 per cent.  They are not in a delinquent category at all.  They are doing even better than some others in the society.

Mr. Klotz:  If it is discriminatory, one then tries to determine whether it is justifiable in a free and democratic society.  That would be the second threshold.  There are certainly some arguments, such as those which we have been hearing from Senator Joyal, which would be made in response.

Senator Beaudoin:  I do not make any affirmation.  I just try to determine whether there is a problem.  If the law applies differently to students in some cases, it must be justified, of course.  You are not aware then of any cases on this?

Mr. Klotz:  There are no specific bankruptcy cases dealing with this issue.  It is so new that students have been treated differently -- a month now -- that there is nothing remotely connected to this issue of students and the Charter of Rights.

Senator Beaudoin:  What about in the United States?

Mr. Klotz:  If it is possible to challenge a law in the United States, I am sure it has been challenged, from my sense of their litigation system.  Nothing I have reviewed, including a published article from one of the learned authors on their student loan provisions, has suggested that it has been challenged constitutionally.  However, it is considered de rigueur to indicate if there might be a Bill of Rights challenge there and I did not see it noted in the article.

If I do come across something pertaining to this issue, I will endeavour to provide it to you because of your interest.

Senator Forest:  I have some concern about changing a law which has only been in place for such a short period of time unless there is some statistical evidence that it needs to be changed.

What was the date on the report from the banking committee?

Mr. Klotz:  Ms Thomson tells me it was early in 1997 and that rings true to me.
Senator Forest:  Their concern then was that there was not a lot of statistical data on which to base the case.  The present law has been in force for such a short time and there has been no opportunity to review how that is going.

Mr. Klotz:  We can say two things.  Clearly we have no court decisions under this new provision and will not have any court decisions until two years from the date the law came into force.  That is the very first time.  If someone quit school on that day and went into bankruptcy the next day, two years from April 30, 1998 would be the first court proceeding.

All we have at this point is anecdotal information about knowledge of this new provision and whether it has the effect of discouraging bankruptcies.  After all, one of the purposes of legislation is to change attitudes, and perhaps change students' attitudes.  One of the learned senators commented that some students will irresponsibly say, "I will file for bankruptcy."

This legislation of two years is intended to change those attitudes.

I think the attitude is changing in the sense that trustees are aware of this issue, they discuss it with students when they file, they are frankly very aware of this pending amendment, and many students are now considering filing for bankruptcy before this comes into force because otherwise they will have to wait the rest of the ten- year period.

There is greater awareness.  In that sense, we do have some anecdotal information that there has been some effectiveness there, but nothing upon which to base any kind of educated decision, in my view.

Senator Forest:  During the hearings of the committee on post-secondary education, on which Senator Lavoie- Roux also served, we certainly heard significant anecdotal evidence from students with respect to the issue and their financial difficulties right across Canada.

Many of the provisions in this bill have been geared toward alleviating those circumstances.  As Senator Joyal mentioned, there are provisions to assist the students.  Nevertheless, I am concerned about this.  A change from two to ten years seems to me to be very significant, and I think we would want to be sure that it was needed on the basis of some statistical evidence.

You say that that the banking committee's report was tabled in 1997.

Mr. Klotz:  To my best recollection.

Senator Bolduc:  I have statistics here from Industry Canada, 1998, about the small business loans program.  The default rate is 6.38 per cent.  I understand that the students who have loans in the province of Quebec, at least, have statistics of 3.1 per cent bankruptcy.  There is half as much bankruptcy in the student loans in our province than in the business loans.  How is it that the general law applies and they put in ten years?

Mr. Klotz:  There is no real answer to that.  However, just to give some qualifications to that, it is difficult to balance apples and oranges, and business bankruptcies are a different kettle of fish, to some extent, than consumer bankruptcies.  That being said, some business bankruptcies, for example, a bankruptcy of a professional, are in fact considered to be a consumer bankruptcy because it is an individual who is filing.  While there may be some slight correlation, they are two different animals.

The question is what you do with that figure, what you make of it.  Is it the result of an intentional policy to grant loans to people who are poor credit risks in order to make education available to Canadian students?  Perhaps that would justify a higher loss ratio, an intentional one.  Is it the intention to lend on a normal commercial risk basis, in which case you can bring the 3 per cent down?  I do not think so.

The statistics are important, but they are specific to the student loan issue that must be examined.  I think you perhaps agree with my perspective in that sense that the statistics are perhaps not as bad as they might be to warrant such a serious remedy.  We just do not know.

Senator Bolduc:  I understand also that the mode of reimbursement by the students is not  based on the income of the various professions.  We know that doctors and lawyers and some dentists can repay fairly quickly, while that may not be the case for philosophers or some others. That aspect is not covered here. However, I mention that because I think it is important.


The Chairman:   Your recommendation is to not proceed with this part of the bill until there is further study and statistical data available?

Mr. Klotz:  Yes.

The Chairman:  Thank you very much.

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