We see debtors in financial trouble who owe money for student loans, in addition to other debt such as credit cards. Sometimes they are able to file a consumer proposal instead of bankruptcy. However, student loan law is complicated and there are some specifics you really need to consider.
To help, here are some answers to how your student loans, and other unsecured debts are treated in each option.
Seven Years Is The Magic Number
If you have been out of school for seven years, your student loans are automatically discharged in a bankruptcy or proposal. In a consumer proposal, that means your student loan lender can receive a share of the proceeds, and your student loans will be eliminated when you are done.
Notice however that I said that you must have been out of school for 7 years for this total and complete discharge with no complications.
Read more: Student Loans and Bankruptcy Law
If you have been out of school for less than 7 years, you can still file a consumer proposal but things get more complicated.
When your student loans are less than 7 years old, your creditors still receive a prorated share of your consumer proposal payments, just like any other unsecured creditor. However, and this is important, once the proposal is over, they can pursue you for the rest of the money they are owed.
Even worse, some student loan lenders automatically vote no to most proposals. If your student loans form a significant portion of your debts, this means the proposal can be rejected.
Does that mean you have no option if your student loans are newer? No.
- If you have significant other debts (like credit card and unsecured bank debt), a proposal will eliminate these debts which can mean that you will now be able to afford your monthly student loan payments.
- You can also ask that your student loan lender agree, up front, to discharge your student loans in full as part of the proposal. Why would they do this? Well if you are close to the 7 year mark and would otherwise file bankruptcy anyway, and you can offer slightly more as an incentive, they may agree. You are still better off, and so are they.
The important point is to talk to your bankruptcy trustee about ALL the options available to you.