Paying Off Student Loans With A Consumer Proposal

How are Student Loan Debts Treated in a Consumer Proposal?

Options Available to Remove Student Debt

When you first borrowed money from the Government of Canada for your education, you probably didn’t anticipate at that stage that you would not be in the position to repay this loan. This loan allowed you to secure an education and the opportunity to anticipate future employment in association with your choice in a career and that would provide the income to pay back the debt. Unfortunately, you never know what to expect from life, which could have meant you were not able to complete what you were studying, you suffered a health issue, or you were not able to secure employment in regards to your chosen career field.

This might have left you with the burden of debt for your student loan that you are unable to pay back in full. But do you really want to file for personal bankruptcy? A consumer proposal is an alternative to personal bankruptcy that involves a proposal to a creditor to compromise your debt. Student loans receive special treatment when it comes to insolvency filing, while the “end of study date” will be the determining factor in whether your student loan debt will be allowed to be compromised within the proposal.

Student Loans And Consumer Proposals

A Licensed Insolvency Trustee can assist you with filing a Consumer Proposal to erase your student loan debt provided your studies came to an end at least 7 years before you file a Consumer Proposal. The “seven-year” rule has to do with s178(1)(g) of the Bankruptcy and Insolvency Act in Canada.

It doesn’t really matter if you were able to complete your studies or not or whether you received a diploma or degree.

If you are not sure if the seven-year period has passed, you can confirm your “last date of study” with National Student Loans. If seven years have passed, a Consumer Proposal can be used to consolidate your debt into one monthly payment, which will include your student debt.

Consumer Proposals are useful to stop any interest on your debt from accruing, including student loan debts. It will also mean that you will be paying less than what you actually owe (subject to credit approval).

If a RAP is not enough relief to provide a remedy to your financial issues, or when you have additional debts over and above a student loan, a Consumer Proposal might be the ideal solution for you. A Consumer Proposal will provide protection from all your creditors and will stop wage garnishments and collection calls.

A Licensed Insolvency Trustee will review your circumstances and then explain the options available to you to remove your student debt. It won’t cost you anything to get the process started, and we provide free consultations.

Options Available to Remove Student Debt

If your last study date was over 7 years before filing a Consumer Proposal, then your student loan can be added to your proposal which has been accepted by most of your creditors.

If your studies ended less than 7 years before filing a Consumer Proposal, you will still have to pay your student loan back on completion of the proposal. Proof of a claim that is filed by a lender allows them to take a portion of the dividends in the proposal which reduces the balance that is owing, yet they can carry on charging you interest over the term of your proposal. A student loan cannot go after you for payments during your proposal term.

If your studies (part-time or full-time) ceased less than 7 years before you file a Consumer Proposal and the proposal has provided a compromise from your student loan and they (the student loans) have voted in favor of the Consumer Proposal and it is accepted by most of the creditors. Then your debt that is left on your student loan can also be compromised in the proposal.

It is essential that you have verified your “end of study date” with the Government of Canada. If you returned to study after the original loan that was provided for your studies, this will complicate the calculation when it comes to the end-of-study date.

You should discuss this with your Licensed Insolvency Trustee.

How is Student Loan Debt Treated in a Consumer Proposal?

When you initially borrowed from the Government of Canada to fund your education, you never anticipated that you wouldn’t be able to repay the loan. The loan enabled you to obtain an education, anticipating that future employment in your career field of choice would provide an income to repay the debt. Unfortunately, life changes and you may not have been able to complete your studies, suffered health issues or weren’t able to obtain employment in your career field.

You are now left burdened with a student loan debt that you can not pay in full but do not want to file a personal bankruptcy. An alternative is to offer a consumer proposal to your creditors to compromise the debt. Student loans are given special treatment in an insolvency filing and your “end of study date” will determine if the student loan can be compromised in a proposal as follows:

If you ceased being a full or part-time student more than 7 years prior to filing a consumer proposal, your student loans will be included in a proposal that is accepted by the required majority of creditors.

If you ceased being a full or part-time student less than 7 years prior to filing a consumer proposal, the student loan will remain payable at the completion of your proposal. A proof of claim filed by the lender will allow them to share in the dividends under your proposal which will reduce the balance owing, but they can continue to charge interest during the term of the proposal. Student loans are not able to pursue you for payment during the proposal term.

If you ceased being a full or part-time student less than 7 years prior to filing a consumer proposal and your proposal explicitly provides for the compromise of the student loan debt and student loans vote in favour of your consumer proposal which is accepted by the required majority of creditors, then the student loan debt will be compromised in your proposal.

Do Consumer Proposals Forgive Student Loans?

Highlights:

Do Consumer Proposals Cover Student Loans?
What Is A Consumer Proposal?
Can A Consumer Proposal Affect Your Credit?
Do Consumer Proposals Forgive New Or Old Student Loans?
Are Old Student Loans Forgiven Under A Consumer Proposal?
Are New Student Loans Forgiven Under A Consumer Proposal?
What Can You Do If Your Student Loan Doesn’t Qualify Under A Consumer Proposal?
Negotiate With Your Lender
Eliminate Other Debt
Speak With Your LIT
Other Ways To Get Rid Of Your Student Debt
Bankruptcy
Repayment Assistance
Consumer Proposals And Student Loans FAQs
Final Thoughts

College and university tuition can be very expensive, forcing students to take out loans to help cover the cost of their post-secondary studies.

According to Statistics Canada, the average student loan debt is $28,000 for a bachelor’s degree and $15,300 for college graduates. And in many cases, the number is much higher, putting grads in a pile of student loan debt for years following graduation.

Unfortunately for many, student debt can be too much to handle. In dire situations, debt relief solutions may be required. If you’re finding yourself unable to pay back your student loan, one way to help reduce or eliminate it is through a consumer proposal.

Read on to find out what’s involved in a consumer proposal, including the costs, eligibility requirements, and its effect on your credit rating.

Do Consumer Proposals Cover Student Loans?

Student loan debt may be alleviated under consumer proposals, depending on your end-of-study date. The amount of time that you’ve been out of school will determine whether or not your student loan debt qualifies for debt forgiveness under a consumer proposal.

What Is A Consumer Proposal?

A consumer proposal is a legal process in which a Licensed Insolvency Trustee (LIT) works with you to resolve your debts. Your LIT will communicate and negotiate with your creditors to come up with an agreement whereby a portion of your outstanding debt is forgiven by your creditors, while the remaining debt is repaid through more affordable installment payments.

If your creditors agree to this arrangement, they’ll cease all debt collection actions, including any lawsuits or wage garnishment.

Can A Consumer Proposal Affect Your Credit?

While this may help alleviate your debt, it can severely negatively affect your credit scores. Consumer proposals result in a credit rating of R7, which will be noted in your credit report. This will remain on your report for 3 years after you’ve repaid all your debts as per the proposal, or 6 years from the consumer proposal filing date, whichever comes first.

During this time, your ability to qualify for financing and credit products will be significantly reduced. But once the negative mark on your report is removed, you can work towards rebuilding your credit.

Do Consumer Proposals Forgive New Or Old Student Loans?

As mentioned, whether or not your student loan qualifies for debt relief under a consumer proposal depends on how old your student debt is.

Are Old Student Loans Forgiven Under A Consumer Proposal?

Your student debt must be more than 5-7 years old in order for it to be considered eligible in a consumer proposal.

If you’ve been out of school for at least 5-7 years, your student debt may qualify for debt forgiveness as part of your consumer proposal. But if you’ve been out of school for less than 7 years, your student loan debt may not be forgiven under this arrangement.

Are New Student Loans Forgiven Under A Consumer Proposal?

If you’ve been out of school for less than 5-7 years, your student debt may not qualify under a and you’ll still be responsible for its payment. Even if your consumer proposal is accepted, your student loans will remain after the proposal has ended.

What Can You Do If Your Student Loan Doesn’t Qualify Under A Consumer Proposal?

Even if your student debt does not qualify for forgiveness under a consumer proposal, a consumer proposal can still help alleviate your debt issues. Here are a few options to consider:

Negotiate With Your Lender

There is an exception to the 5-7-year rule when it comes to using a consumer proposal to deal with your student debt. If your student loan lender agrees to discharge your student debt — even if it’s been less than 5-7 years — a consumer proposal may work. Your lender would have to detail the amount you need to pay back in your proposal agreement and promise not to pursue you for payments after your consumer proposal is paid off.

Some lenders may agree to this arrangement to avoid dealing with bankruptcy, which is costly to both borrowers and lenders. Your lender may be even more incentivized if you’re close to the 5-7-year mark.

Eliminate Other Debt

If you have a lot of other unresolved debt besides your student loan, you may be able to use a consumer proposal to have other debt forgiven. For instance, other unsecured debts like credit cards, personal loans, or payday loans can also put pressure on your finances.

If you have a lot of other debt piling up, consider a consumer proposal to deal with this debt besides your student loan. This may help open up your finances and make your student loan payments more affordable.

Speak With Your LIT

There may be other debt relief solutions available to you to help you deal with your student debt. Speak with your LIT, who can assess your financial situation and provide other debt relief solutions that may work for you.

Other Ways To Get Rid Of Your Student Debt

Aside from a consumer proposal, there may be other ways to eliminate your student loan debt, including the following:

Bankruptcy

The last resort in dealing with debt is bankruptcy. This process will also eliminate your student debt if you’ve been out of school for at least 5-7 years.

Bankruptcy is a legal process that involves discharging your debt if you’re unable to repay it. This process is typically the most cost-effective and quickest way to eliminate student loan debt and may be more suitable if you can’t afford the costs associated with filing a consumer proposal. It may also be a better option if you need financial relief from all of your other debts, including your student loan.

Like a consumer proposal, bankruptcy involves working with a LIT who will work on your behalf and guide you through the bankruptcy process.

Repayment Assistance

The federal government in Canada offers repayment assistance that can help you repay your student loan through the following programs:

Repayment Assistance Plan (RAP)

You may be eligible for reduced payments or no payments at all under RAP, depending on your income. You can apply for RAP when you start repaying your student loans and must reapply every 6 months to remain qualified for the plan.

You will also have to pay the interest owed on your outstanding debt that is not covered by your reduced payment. You’ll also need to start repaying the principal and interest after 5 years of RAP or 10 years after you complete school.

Repayment Assistance Plan for Borrowers with Disabilities (RAP-D)

If you qualify for RAP-D, the Canadian government will repay the principal and interest on your behalf that your reduced monthly payments don’t cover. The outstanding balance will continue to be paid back until it is fully repaid, as long as you remain eligible for the plan.