How Bankruptcy and Consumer Proposals Impact Student Loans

Plus Tips For Paying Off Student Debt

The average student loan debt is approximately $27,000, depending on the province you are in. For students just getting into the job market in entry level positions, along with the cost of living, repayment can be a struggle for many.

In many cases, filing an assignment in bankruptcy or a consumer proposal does not automatically discharge student loans, but if you’re struggling with repayment, there may be options available out there to help your case.

How Student Loans Work

There are several types of student loans. Government school loan programs can help you fund your education. There are federal student loans and also provincial and territorial school loans, and the rules vary depending on your province. Another option is a private student loan, for example a student line of credit from a financial institution.

What are Bankruptcy and Consumer Proposals

When it comes to consumer proposals and bankruptcy, it’s important to know that each process is similar, but they have key differences. Both are legal processes which are designed to provide debt relief. Each process is administered by a Licensed Insolvency Trustee (LIT) pursuant to the Bankruptcy and Insolvency Act. When you file either process, the creditors are unable to take further action against you or the collection of the debts owed to them. They are prevented from contacting you and all communication then remains with the LIT.

Bankruptcy allows you to start a fresh financial life by eliminating unsecured debts. However, you must surrender your assets to the LIT (excluding assets with certain exemptions) in exchange for the elimination of your debts. You may also be required to make monthly surplus payments, depending on your income.

A consumer proposal, on the other hand, is a debt settlement agreement between you and your creditors that allows you to pay back, in many situations, a fraction of the debt that you owe – interest free – over an agreed upon period of time. Unlike bankruptcy, consumer proposals do not require you to give up your assets.

Does Bankruptcy Eliminate Student Debt?

It is possible for student debt to be eliminated through the bankruptcy process, however, there are waiting periods to consider. Seven years from the date of the end of your education must have passed before your student debt can be discharged through bankruptcy. In the event it has not been 7 years, but 5 years has expired since the completion of school, you may make an application to Court to seek the discharge the debt, based on your personal circumstances.

What About Consumer Proposals?

Student loans are also included in a Consumer Proposal, however, like bankruptcy, you must ask yourself “what was the last day of the month in which you completed your studies?” As long as more than 7 years have passed since that day, your student loans can be discharged in a consumer proposal. If your loan was obtained through a private lender, you do not have to wait the 7-year period.

Which Option Should You Choose?

This decision is dependent on your personal situation, however, in many cases, a consumer proposal is recommended over bankruptcy. A consumer proposal will have less of an impact on your credit than bankruptcy, and allows you to keep your assets. Plus, payments are set at an amount you can afford over the course of a specified period of time. Speak to an LIT to help determine which option is best for your particular situation.

Tips for Paying Off Student Debt

Repaying student loans can be difficult for many, due to the nature of starting fresh in your career and being in a more entry level salary bracket. It’s important to know what you owe and have a repayment plan.

Below, we explore some tips to ensure that you are taking the necessary steps to help you in the repayment process.


Understanding what you can manage in terms of a budget will help tremendously. Track the ins and outs, set financial boundaries and a personal agreement to make specific payments each month, and make realistic payments. The sooner you start repayment, the better off you will be.

High-interest rate loans can have a serious impact on your credit and overall financial health, and it is strongly recommended that you pay off more than your minimum payments each month. This will counteract some of the interest you’re paying by having more of your payments applied to the principal balance.

Credit Counselling

If you’re unsure or confused about the process or how to manage it, speaking with a professional credit counsellor can make a world of difference. Counsellors are equipped with all sorts of knowledge and tips to help you manage repayment and get your debt under control.

Lump Sum Payments When Possible

When possible, make lump sum payments towards your loan. In most cases, any extra payments made will be directly applied to the principal balance instead of being sucked up by interest. This makes a big difference

No Spend Challenge

Challenge yourself. Involve your friends. Have a no-spend challenge for 30 days. The money you saved by making simple alternative choices to avoid spending can allow you pay down your debt more quickly. Small sacrifices can make a big difference.

Know Your Options

If you are struggling financially and having difficulty staying afloat, know that there are options out there to help you transition and pay off your student debts. Speaking with a credit counsellor or an LIT can really help you understand the bigger picture, take a load off of your mind, and help guide you down a path of repayment living debt-free.