When should you declare bankruptcy because of your student loans?

Last year, I got married. I also paid off the last of my student loans. Both of these things were cool, but if anyone asked me which felt more significant, measured solely in terms of how much existential dread had dissolved to make way for pure, unfettered elation, the answer would be clear: the loans.

Servicing a debt can be brutal. This is especially the case when you live in a city like Toronto or Vancouver, where the cost of living is so high that being able to cover your bills can already feel like a feat. With the average student debt balance totalling about $26,000 upon graduation, it’s not likely that your debt will be wiped out after just a few years of hardship, either.

I’ve watched friends consider everything from moving back in with their parents to bankruptcy as a way to deal with their student debt. All too often, the only advice that they ever got was to budget more smartly, as if it were their everyday choices, and not high living costs or a widespread shortage of stable, decently-paying work, that was the problem.

This story is not about how to budget. It’s about how to move forward when you’ve done everything you can to follow the terms of your repayment plan — and are still falling short. To help walk you through your next steps, we talked to Liz Schieck, financial coach and planner at Toronto’s New School of Finance, and Doug Hoyes, co-founder of Hoyes, Michalos & Associates Inc., to ask for advice. What are your options if you really can’t pay back your student loans?
 

Talk to your creditor — using your voice

Once you’ve decided that you can’t keep up with your current repayment plan, your first step is to calculate the absolute maximum that you can afford to pay each month. (If your answer is $0, that’s okay.)

Your second step? Talk to your creditor and ask them if you can negotiate a more affordable repayment plan. And by talk, we mean talk: if your creditor is a bank, set up a face-to-face appointment. If you have government student loans, call their repayment assistance department.

“It’s always possible to talk to someone,” said Hoyes. “Whether you’ll be successful or not is another story. But if you don’t ask, you don’t get.”

Negotiating with your creditor might seem like an intimidating task. But, they might also be more flexible than you think. Depending on whether your creditor is a bank or the government, you’ll want to approach the conversation a bit differently.

Negotiating your government loans 

In the past five years, the federal government has had to write off outstanding student loans four times after making “reasonable efforts to collect the amounts owed.” The most recent write-off, back in January, totalled more than $163 million.

This context is important to consider as you prepare to call your government student loan provider. Remember: the government doesn’t want to lose more money, and they know that making repayment easier for debtors ultimately benefits former students and government coffers.

“If you’re talking about a government student loan, you’re going to be talking directly to the repayment assistance department,” said Schieck. “Their entire job is to help.”

“Government student loans, in all provinces, have quite flexible terms and generous support options available,” she adds.

If you’ve been struggling with your loans for a while now, you may already be familiar with repayment assistance. This is the program that’s meant to help you when you’re short on cash — and it’s offered by government student loans providers themselves. For example, Ontario’s student loans provider, Ontario Student Assistance Program (OSAP), allows you to apply for six month periods where the creditor either reduces your payment, or doesn’t charge you anything at all. Typically, you aren’t charged any interest when you’re on repayment assistance, either.

While you can apply for repayment assistance online, Schieck strongly recommends talking to an actual person over the phone — because the online application doesn’t help you paint a fair picture of your finances.

“They look at purely your monthly income,” she says. “So if you say my monthly income is say, $5,000 or something like that, they might say, oh you can afford to pay this. They don’t ask you about your expenses on the online application.”

Let’s say you do make $5,000 a month, but you’re also paying back other types of debt, or you have to pay for childcare. All of those other expenses will also impact how much you can afford to pay your student loan provider each month. “I always encourage people to give them a call and explain your situation,” says Schieck.
 

Negotiating your student line of credit

The bad news is that banks won’t be as flexible as the government. “That can be trickier because they do tend to have a lot less flexibility,” says Schieck. “They don’t have programs like repayment assistance with bank loans.”

But, it’s possible to get a better deal. The key is to do your research beforehand — have a clear picture of what you can afford, and figure out what kinds of deals people typically strike with their creditors — and to come up with a list of suggestions. These could include lowering your interest rate, or extending your repayment period so that even though you do end up paying more interest in total, you’ll also be able to keep up with regular payments without hurting your budget.

“If you know that there’s a dollar amount that you can afford — like if your [current] payment is $400 and you know that you can’t do that but you can do $250 — go into the bank and say, ‘This is my situation. Is there anything you can do with me about this?” Schieck recommends.
 

Talk to an insolvency expert

If you’ve talked to your creditor and still can’t settle on a deal that works for you, it’s time to talk to an insolvency trustee. With student loans, there are two routes you can take: a consumer proposal or bankruptcy. You should note, though, that neither of these options are available for government student loans until seven years after your last date of study. (In exceptional cases, the court can knock this number down to five.)

In Canada, only licensed insolvency trustees are legally allowed to file a consumer proposal or bankruptcy on your behalf; it’s not something you can do yourself. Some financial planners, credit counsellors, or debt consultants might try to charge you for the service. Unless they’re licensed, however, they can’t actually do anything for you.

Under Canadian law, licensed insolvency trustees are not allowed to charge an upfront fee, either — instead, they’re paid out of the funds that are distributed to your creditors. “The consultation is free — that’s the law,” says Hoyes.
 

Filing a consumer proposal

“A consumer proposal is a deal that we make with everybody you owe money to,” explains Hoyes. Under this deal, you’ll still have to pay the creditors back some money. But, that amount will be significantly reduced.

Let’s say you owe your creditors $35,000. An insolvency trustee would negotiate with your creditor to knock that number down — say, to $15,000. They would then work out a new repayment plan, which you’d have to complete within five years. If you get a new, higher-paying job or receive a windfall during your repayment period, you can increase your monthly payments so that you can pay off the debt faster — the debt won’t scale up based on your income.

Seeing your debt load decrease by thousands of dollars may sound like a dream come true, but a consumer proposal comes with consequences.

When you file a consumer proposal, your credit report will have a note indicating that you’ve done so. This negatively impacts your credit: lenders will be less likely to give you a loan, whether that’s in the form of a mortgage, credit card, auto loan, or line of credit, and if you do manage to secure one, it’ll likely come with a high interest rate. If you’re a renter and plan to move, a landlord will also be less likely to approve your application if they run a credit check on you.

This last point is especially important to keep in mind if you live in a city with a competitive rental market like Toronto, where even people with excellent credit have a hard time securing a place to live.

All that being said, the note only stays on your credit report for three years after you’ve made your last debt repayment. And there are definitely ways to rebuild your credit — even while you’re in repayment mode.

Bankruptcy

Like a consumer proposal, a bankruptcy will help you reduce your debts. Essentially, your debt is wiped clean — but that doesn’t mean you’re completely off the hook.

When you file for bankruptcy, you lose any assets you have, like a house, car, or investments.

In most cases, you’ll also have to pay your trustee an administrative fee for each of the months that you’re bankrupt. Bankruptcy periods last for a minimum of nine months in Canada.

Finally, you’ll have to contribute whatever “surplus income” you have to your bankruptcy. The Canadian government sets a threshold each year for how much income a household needs to maintain a “reasonable” standard of living. If your income exceeds this threshold, you’re required to contribute extra money into your bankruptcy — the exact amount will scale up the higher your income is. Your income could also impact how long your bankruptcy period lasts.

“If your income is below the [government] limit, and you’ve never been bankrupt before, you’re eligible to be automatically discharged in nine months,” Hoyes explains. “But if your income is over the limit, then an extra year gets added.”

As with a consumer proposal, when you file for bankruptcy, you’ll get a note on your credit report indicating that you’ve done so. However, the note will stay on your report for six years after the end of your bankruptcy period — not just three, as with a consumer proposal. If you’re thinking about filing for bankruptcy, think seriously about the consequences and how they would impact your life before you move forward.

“It’s not the end of the world,” says Schieck. “You can bounce back from that, you can rebuild your credit — it’s not totally going to ruin your life. But it does mean that you want to approach those things with caution.”
 

“Stage 2” of your government student loans

When you’ve successfully received repayment assistance from your government lender 10 times, or you still have trouble meeting your monthly payments 10 years after your last study date, you move onto what the government calls “stage two” of its repayment assistance program.

Whereas repayment assistance up to this point had been about interest relief — e.g., the government temporarily stopped charging you interest — stage two focuses instead on debt reduction. In other words, the government starts helping you tackle your principal.

This doesn’t necessarily mean that the government will completely clear you of debt. “What they will actually do is determine what you are able to pay, if anything, and you’ll pay it,” Schieck explains. “And essentially, the government covers the rest. If you are in a situation where you truly can’t afford to pay it back, there will come a point where a part of the debt is forgiven.”

“Which literally never happens with a bank,” she adds.
 

You’re not alone 

Both Schieck and Hoyes have seen their fair share of people struggling with student debt. “You’re not alone,” says Schieck. “Trust me, a lot of people are struggling with debt all across Canada and the world. You’re not the only person going through it.”

“Debt problems don’t go away on their own,” adds Hoyes. “So if you’ve been struggling with student loans for many years, then you should reach out for help.”

Both also emphasize that while none of the options are ideal — especially if they mess with your credit — you’ll still be able to recover. And that doesn’t necessarily mean prioritizing rebuilding your credit above all else.

“You’ve done your bankruptcy, your consumer proposal, you’ve paid off your student loans,” says Hoyes. “Now what you’ve got to do is focus on things that will improve your financial condition.” This includes getting a job and building an emergency savings fund.

“Not your credit score,” he says. “But actual real life.”