Student Bankruptcy: Recommended Strategies and Tactics
What You Should Know If You Cannot Pay Your Student Loans
It is very common for people coming out of university or community college to be burdened by significant debt levels. A significant amount of this debt might be for student loans and in some instances other types of unsecured consumer debt—primarily credit card debt.
The purpose of this article is to address some of the key issues facing people who owe a significant amount of money because of student loans.
This is the Fourth Article In a Series of Four About Student Bankruptcy:
To find out more about Student Loan Debt and Recommended Strategies and Tactics read on, you can also skip to another section by clicking one of the links below.
- Background Information
- Student loan debt and waiting periods
- Automatic stay of proceedings
- Recommended Strategies and Tactics
Part Four: Recommended Strategies and Tactics
1. Avoid filing for personal bankruptcy or making a consumer proposal within seven years of leaving school
Where possible a debtor with substantial student loans should avoid either filing for personal bankruptcy or making a consumer proposal unless they are entitled to an automatic discharge—in circumstances where they ceased attending school more than seven years ago. As a general rule, if you file for personal bankruptcy or make a consumer proposal then there is a good chance that your unpaid student loans will survive and will not be forgiven.
2. Exhaust any potential relief from the entity making the student loan
A debtor with student loan indebtedness should explore any and all potential relief available from the entity that lent them the student loans. A debtor who takes advantage of this relief might put themselves in a position where they can ultimately satisfy the seven-year waiting period.
3. If you are going to default on your student loan obligations make every effort to make small weekly or monthly payments towards your student loans
If you are having problems making your student loan payments, then one of the most helpful things that you can do is simply to make small, regular payments, on a weekly or monthly basis towards your student loans. An example will illustrate this point. Let’s assume you are supposed to be paying $300 a month on your outstanding student loan. Instead of completely defaulting on your obligations, try and pay $50 a month or $20 per week on your loan.
This strategy can have a number of advantages. In the short-term, it might mean that you won’t be receiving collection calls. Secondly, it might also discourage your file from being earmarked for escalation.
In the longer term, making small payments buys you time. It might buy you enough time to satisfy the seven-year waiting period for an automatic discharge, or the five-year waiting period, which would enable you to bring an application before a judge for a “court-ordered discharge” on the basis of the “hardship provision” under Canada’s insolvency laws. Finally, it might buy you enough time that you can take advantage of a limitation period or a settlement on your non-student loan debt—more specifically your unsecured consumer debt.
4. Potential for settling an unpaid student loan at substantial discount by making a one-time payment
In Canada, not only does the National Student Loan program make Canada Student Loans but also in each province there are entities which make provincial student loans. It is beyond the scope of this article to identify those circumstances where a particular provider of student loans will negotiate a settlement of an unpaid student loan. If you have an unpaid student loan it would be prudent for you to speak to the collection agent responsible for collecting your unpaid student loan and learning more about a potential one-time lump sum settlement.
In some instances, it is possible to negotiate a one-time lump sum payment on an unpaid student loan as settlement in full—for an amount which is substantially less than the current outstanding balance.
5. Consider using credit counselling as a potential “bridging strategy” to help you satisfy the seven-year waiting period
If you have some unsecured consumer debt—typically credit card debt– in addition to your student loan debt then you might want to consider using credit counselling as a “bridging strategy” to help you make the seven –year waiting period. An example will help illustrate the potential benefit of this “bridging strategy”.
John finished attending university five years ago at which time he obtained his degree. John has a substantial amount of debt—about half of which is outstanding student loans and the other half is credit card debt. If John were to file for personal bankruptcy or make a consumer proposal today then his student loan debt would not be discharged because he has yet to satisfy the seven-year waiting period.
John could, however, enroll in a Debt Management Plan with a credit counselling agency. Under this Debt Management Plan, Johns’ credit cards—but not his student loans—would be included in his Debt Management Plan. Under a Debt Management Plan, we would anticipate that John would repay one hundred percent of his outstanding credit card by making installment payments over 48 months.
This would effectively reduce the monthly payments that John is paying to service his unsecured creditors and service this debt. This might enable John to service his current debt obligations because he has lowered his total monthly payment obligations to his creditors. Two years into the future, at which time John is now in a position to satisfy the seven-year waiting rule, John could drop out of his Debt Management Plan with the credit counselling agency, and John could file for personal bankruptcy at which time both his student loan debts and his credit card debt would be discharged.
If you want to learn more about how to deal with your student loan debt then you should speak with a Licensed Insolvency Trustee.
Return to the First Article “Background Information”
If you want to learn more about how to deal with your student loan debt then you should speak with a Licensed Insolvency Trustee.
You can also skip to any one of the article sections below to continue reading or re-cap on any information covered in this series of articles;
- Background Information
- Student loan debt and waiting periods
- Automatic stay of proceedings
- Recommended Strategies and Tactics