Understanding Your Options For Dealing With Student Loan Debt
Seeking higher education often comes with the burden of student loans. For many, repaying these loans becomes a daunting task due to unforeseen life circumstances like health issues, job loss, or inability to find gainful employment in the chosen field. The question that arises then is: Are student loans forgiven in a consumer proposal? This article aims to shed light on this subject and provide comprehensive information on managing student loan debt in Canada.
Understanding Student Loan Debt
Student loan debt in Canada is governed by specific rules and regulations under the Bankruptcy & Insolvency Act. While most unsecured debts, such as credit card debts, can be eliminated through bankruptcy, student loans are treated differently.
Whether your student loan debt can be forgiven through a consumer proposal or personal bankruptcy depends on several factors, including the age of your student loans, the type of loans (private or government-guaranteed), your budget, and your overall financial situation.
The Seven-Year Rule: A Key Component
A crucial aspect of considering whether student loans are forgiven in a consumer proposal is the ‘Seven-Year Rule.’ According to Section 178 (1) of the Bankruptcy & Insolvency Act, government-guaranteed student loans are not included in bankruptcy or consumer proposal if you have been a full or part-time student any time in the past seven years.
In simpler terms, if you have been out of school for more than seven years, your student loan debt can be eliminated if:
- You declare personal bankruptcy, or
- You make a debt proposal to your creditors through a consumer proposal.
However, 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.
The Impact of Other Debts
What happens if you have more than just student loans? Significant debts like credit card debts, lines of credit, or payday loans can make a bankruptcy or consumer proposal a viable option, even if you don’t meet the seven-year waiting period. Filing for bankruptcy can help clear other debts and make repaying your student loan more manageable.
The Role of Consumer Proposal in Student Loans
A consumer proposal serves as a negotiation tool to renegotiate repayment terms with your creditors. It’s a less drastic alternative than bankruptcy and can offer much-needed relief from the burden of debt.
Student loans can be included in a consumer proposal and are eligible for release if they meet the seven-year rule. It’s important to note that if your student debts are less than seven years old, the student loan lender is still unable to collect while you are in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal, which many find feasible since their other debt payments have been eliminated.
Student Debt Consolidation: A Viable Option?
Student debt consolidation is not common in Canada due to various reasons. A consolidation loan essentially repays an old debt and replaces it with a new debt. Therefore, a student debt consolidation loan would no longer technically be a student loan but a new debt. Moreover, converting government-guaranteed student loans to a private debt consolidation loan can have potential drawbacks, including the elimination of student debt tax benefits and disqualification from any government repayment assistance program.
Private Student Loan Bankruptcy: What You Need To Know
If your student loans are private bank loans like a student line of credit or student credit card debts, these types of consumer debts are eligible for automatic discharge under the Bankruptcy & Insolvency Act, irrespective of their age. This applies to 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 and is automatically discharged with no waiting period.
Dealing with Student Debt Less Than Seven Years Old
For student loans that are less than seven years old, there are still options available to make repayment easier. You can:
- Negotiate new payment arrangements with the student loans office.
- Apply for a temporary reduction in payments.
- Extend your payment period for up to 14.5 years.
- Apply for a hardship reduction.
However, remember that these options might keep you in debt for a longer period and increase the total interest you pay on your student debt.
Eliminating Student Loan Debt: How to Proceed
If you’re struggling with student loan debt, do not despair. Consult with experts, such as Licensed Insolvency Trustees, to discuss your specific situation. Let them guide you to the right solution to resolve your student loan debts. Remember, every case is unique, and what worked for someone else might not be the best solution for you.
Conclusion
To sum up, whether student loans are forgiven in a consumer proposal depends on several factors, including the age of the loan and your personal financial situation. It’s important to seek professional advice to understand your options and make the best decision for your financial future.
Remember, financial hardships can happen to anyone. The key is to arm yourself with the right knowledge and make informed decisions.
