Is Bankruptcy or a Consumer Proposal Best For Student Debt Relief And Repayment?
Did you know that only 34% of Canadian students pay off their student loans within three years of graduation?
For the remaining 66%, it will likely take you upwards of six years to be completely debt-free.
This is a significant problem that affects millions of Canadian graduates every single year.
While some will argue that student debt is good debt, you still owe a lot of money.
Furthermore, you may be in debt to various financial institutions, depending on where you borrowed money from.
Thankfully, there are ways to help with student debt relief.
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For people with non-student-related debts, two of the most obvious options are consumer credit proposals or bankruptcy.
Are these viable options for people with student debt?
Let’s take a look.
What is a Consumer Proposal?
A consumer proposal is specifically for individuals with insurmountable debts.
It is a process that helps you come to an agreement with your creditors.
The premise is that you propose an offer, telling them that you can’t afford to pay your debts, but you can afford a certain amount.
If they accept your proposal, you go ahead and repay your newly agreed debts however you like.
The benefit of a consumer proposal is that you can reduce your overall debts and avoid bankruptcy.
The downside is that there’s no guarantee your creditors will accept it.
Can you use a Consumer Proposal for student debt?
Here’s where things get slightly complicated.
Technically speaking, student debt is an unsecured debt.
No assets are used to secure it, so you’d think it would qualify for a consumer proposal.
All other unsecured assets automatically qualify.
Unfortunately, you have to be out of school for at least seven years before you can add your student debt to a consumer proposal.
The reason for the delay is that it gives you a chance to pay off the debt.
If you’re still struggling after seven years, then a consumer proposal can be used to help you out.
You’ll need a Licensed Insolvency Trustee to handle proceedings, and you also have to hope that your creditors accept the proposal.
It’s also worth pointing out that you can use a consumer proposal to reduce some of your other debts.
Many people with student debts have other debts.
This might include personal loans, credit card debt, etc.
In this scenario, a consumer proposal can get rid of or reduce these debts – regardless of how long you’ve been out of school.
While your student loans won’t be affected, reducing other debts may make it easier to start paying off that loan.
What is bankruptcy?
Those of you that grew up playing Monopoly may have a vague idea as to what bankruptcy entails.
A very common misconception is that it means you are left with no money at all.
It’s very much a last-case scenario for anyone in serious debt.
Bankruptcy is typically only used if no other debt-relief solutions work.
When creditors don’t accept your consumer proposal, this is the next step.
You’ll pay as much money as you can afford, and your debts will be wiped out.
It gives you an opportunity to completely wipe your slate clean and start a new financial journey.
Are student loans covered in bankruptcy?
Yes and no.
The answer is almost exactly the same as it is for consumer proposals.
Again, there is typically a seven-year threshold that you have to meet.
You can still file for bankruptcy if you’ve been out of school for less time, but your student debt won’t be discharged.
This means any other debts are wiped out, but the student loan stays where it is.
The only difference is that you might be able to apply for an early student loan bankruptcy charge.
Under Canadian law, there is something known as a hardship provision.
This allows you to apply for an early discharge on your student loans if you haven’t been a student for five years.
As such, that’s two years earlier than the seven-year waiting period.
However, there are terms you must meet to be granted this provision.
If you meet them, your bankruptcy will discharge your student loan as well.
Which option is best?
For the most part, a consumer proposal is a better way of dealing with student debt.
This is mainly because it’s slightly less extreme, and you can maintain some degree of financial dependency.
Furthermore, a consumer proposal will only stay on your credit report for three years.
After this period it is removed, meaning you can build your credit score back to a healthy level.
Bankruptcy stays on your report for six years, which is a problem.
If you consider your age after graduation, then factor in the seven-year waiting period, you could be around 28 when you file for bankruptcy.
This is the prime age where you might think about buying a house.
With bankruptcy on your credit report for a further six years, it inhibits your ability to apply for mortgages as your rating is low.
In summary, both consumer proposals and bankruptcy can help you get out of student debt.
They are quite extreme solutions that should only be tried if you’ve attempted other repayment or restructuring ideas beforehand.
Get help with student debt relief
Being in student debt is highly problematic.
It can prevent you from buying things that you need, and it often leads to other forms of debt as well.
Before you know it, you’ve fallen into a debt trap full of credit cards, personal loans, and so on.
As Licensed Insolvency Trustees, we can help with both consumer proposals and personal bankruptcy.
We’re also eager to provide other debt-relief services to get creditors off your back.
Call us now or fill in our online evaluation form to book a consultation with debt-relief experts.