If you are looking for relief from student loan debt, a bankruptcy or consumer proposal may be the right solution. Which option makes sense for you depends on how old your student loans are, whether your student debts are a private student loan with a bank or are government guaranteed student loans, and what your budget can afford.
Our licensed insolvency trustees can help you review the pros and costs of each student debt relief option and decide which will work for you.
Here is some information you may want to talk about.
Student Loan Debt and Bankruptcy Law in Canada
In Canada, student loans are subject to special treatment under the Bankruptcy & Insolvency Act.
While bankruptcy eliminates most unsecured debt, like credit card debt, there are special laws governing government guaranteed student loan discharge in bankruptcy or consumer proposal (for example OSAP loans).
Seven-year Waiting Period
Section 178 (1) of the Bankruptcy & Insolvency Act in Canada specifically excludes government guaranteed student loans if you have been a full or part-time student any time in the past seven years.
To put it simply, if you have been out of school for more than seven years your student loan debt will be eliminated if:
- you declare personal bankruptcy or
- if you make a debt proposal to your creditors through a consumer proposal.
If it has been less than seven years since you were a student, your government guaranteed student loan will not be automatically discharged through a bankruptcy or a consumer proposal.
What if I have more debts than just my student loans?
If you have other significant debts like credit card debts, lines of credit or payday loans, a bankruptcy or consumer may still be a good option even if you don’t meet the waiting period. Filing bankruptcy can help clear other debts and make repaying your student loan more manageable.
We know this can be confusing. Our Licensed Insolvency Trustees will discuss the treatment of your specific student loans during your free consultation before you file.
Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings
When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can, however, opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated.
As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. this dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
Student Debt Consolidation
Student debt consolidation is not common in Canada for many reasons. A consolidation loan repays an old debt and replaces it with a new debt. A student debt consolidation loan would be new debt, and as such is no longer technically a student loan.
If you have government guaranteed student loans, your current interest rate is likely lower than any student debt consolidation loan. In addition, converting government guaranteed student loans to a private debt consolidation loan will eliminate any student debt tax benefits (interest on eligible student loans is a non-refundable tax credit). You will also no longer qualify for any government repayment assistance program.
Banks and financial institutions in Canada are unlikely to approve a consolidation loan for student debt. If you cannot afford your low interest student loan payments, you likely cannot afford a consolidation loan.
A consumer proposal is a viable mechanism to consolidate old debt, including eligible student loans, into one monthly payment.
Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are.
This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period.
If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
Student Debt Less Than Seven Years Old
If your student loan is less than 7 years old, then you still have student loan forgiveness options that can help make repayment of your student debt easier.
Negotiate new payment arrangements. Try contacting the student loans office to negotiate a new payment arrangement. Repayment assistance is available through the National Student Loan Service Centre and their Repayment Assistance Plan. You can:
- Ask for a temporary reduction in payments including making interest only payments.
- Ask for more time to repay your student debt. You can extend your payment period for up to 14.5 years.
- Apply for a hardship reduction. The government will reduce your interest costs for the first 10 years and may reduce the principal owing after 10 years. However, you must prove financial hardship to qualify, including meeting an income threshold and approval is not guaranteed.
Be aware that the first two options will keep you in debt longer and will increase the total interest you pay on your student debt.
The hardship option is the only option, other than bankruptcy or a consumer proposal, that will reduce the total student loan payments you make over time. If you are successful in negotiating new student debt repayment terms, do your best to maintain the payments to sustain your agreement.
Eliminate Student Loan Debt
If you are experiencing problems paying your Ontario student loan we can answer questions that will help you resolve student loans.
We offer a free, no obligation consultation. One of our experts will personally review your situation and answer all your student debt related questions.
Let us help you choose the correct solution to resolve your student loan debts.