Should I Consolidate My Student Loan and Credit Card Debt?


Category: Bankruptcy Q&A (2) comments

Question: I have a pretty hefty student loan of $55,000, which I’ve recently started paying. I also owe about $12,000 in credit card debt. I’m wondering if I should apply for a consolidated debt loan of $67,000. My monthly payments would be roughly $700, half of which are monthly interest charges. I can afford to pay this now, but my job is not steady and my income can drop. Should I try for a debt consolidation loan or something else?

Student Loan Debt Consolidation

The correct decision will depend, in part, on the age of your student loan. A student loan is only automatically discharged when filing bankruptcy or a consumer proposal in Canada if you have “ceased to be a student” for more than seven years at the time of your filing. If you are a recent graduate, your student loan will not be discharged.

Cost of consolidation

It sounds like in your case your student loan debt is less than seven years old. If this is the case, a debt consolidation loan may be a good alternative. However, before “signing on the dotted line” for the loan, you should consider the cost of the loan, as compared to simply continuing to pay your student loan directly. A government guaranteed student loan may have a lower interest rate than a bank loan, and it may have more favourable pre-payment privileges. If you have extra money you can generally pay extra on a student loan to get it paid off faster. With a bank loan you may not have that opportunity.

Debt Management Option

You also have the alternative of continuing to make your student loan payments but deal with your credit card debt. A credit counselling agency can help you develop a debt management plan to pay off your credit card debt. This will require you to pay your credit card debt in full but will give you relief from interest and penalties.  If you can afford to pay back the full $12,000 in credit card debt this may be a good solution. If you cannot afford to pay both your student loan debt and your credit card debt you could try and settle your credit card debt through a consumer proposal.

No matter which option you choose, if you are concerned about your job, it would be prudent to “bank” some extra money each month, so that if you do lose your job you have funds to continue making your loan payments until you find a new job.

Bankruptcy or Consumer Proposal

If your student loan is more than seven years old, a bankruptcy or consumer proposal may be an option to deal with all of your debts. However, the cost of bankruptcy depends on your income, so if you are working now and can afford to pay $700 on a loan, the cost of a bankruptcy may be quite expensive. In this case, a consumer proposal may be a better alternative.

Every situation is unique. To get advice about your situation, book a no-charge consultation with a Canada bankruptcy trustee to review your options and help you decide which solution works best for you.

Leave A Comment

  1. Kelly

    I am at the end of my bankruptcy. I have not followed through with all my payments but make well above the surplus income. I have met all other requirements of attending 2 sessions and submitted all necessary paperwork. I am meeting with my LIT to discuss my balance owed. Is this a negotiable balance? Can I negotiate a small lump sum of it can be paid immediately

    Reply
    1. Ted Michalos

      Probably not. Years ago the surplus income amounts were “negotiable” and many trustees simply did not collect them. Then they were made mandatory. You have the right to request “mediation” if you disagree with how your LIT completed the calculations, or if you believe you have some sort of extenuating circumstances that warrant a reduction. Otherwise your LIT is required to collect the calculated amount. You also have the right to ask the Court to set your surplus payment, but that is somewhat risky. The Court might agree with you and reduce the number, or the Court might decide you could have filed a proposal instead of bankruptcy and order you to pay more. No one wants to pay, but consider how much you are required to pay in comparison to how much debt will be eliminated. In most cases there is no comparison…

      Reply

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