ARC and my Ontario Student Loan

I have an outstanding Ontario Student Loan and Canada Student Loan.  They've gone to collection agencies.  I wasn't able to pay them off for a number of years because I was unemployed, returned to school, and just generally lazy ;-).

Anyways, I've been employed now here in Ontario for a year.  Accounts Recovery Corp. started phoning me about my outstanding Ontario Student Loan.  They called me twice at work (I have no idea how they got my work number, but I do not want them calling me there under any circumstances).  I called them back this evening and spoke to a woman there.  I owe about $12000 on my OSL loan, but she told me that if I pay it all off now in one big sum I will only have to pay about $10000.

Of course I can't pay it off all at once, I simply don't have that kind of money.  I offered numerous times throughout the call to pay it in installments (approx. $100/month, maybe more, maybe less, depending on how much I need to set aside for rent, car payments, etc.).  The woman from ARC wouldn't accept that.  She is under the impression that I can go to the bank tomorrow and apply for a bank loan to pay it all off.  I told her repeatedly that that is unlikely, as my credit rating is in the toilet and no bank in the country would dare give me a loan.  ARC woman wouldn't accept that, insisting that banks give loans to people with bad credit all the time.  I don't believe her at all, when I told her this she accused me of calling her a liar.

She also told me that my outstanding Canada Student Loan does not affect my credit rating, is that true?

Long story short, ARC woman wants me to go to the bank and apply for a loan to show 'proof' that I'm making an effort to try and pay this off.  I'll go to the bank tomorrow and apply, but I don't expect to get it.  I'm supposed to phone her back after I apply.  If I'm turned down for the loan then she will discuss what my options are.

At first I wasn't going to go to the bank, but she threatened to get in touch with my employer's payroll office and take steps to garnish up to 33% of my paycheque.  I can't afford that, otherwise I might as well quit my job and move home.  What are my rights here?  If I don't get approved for a loan do they have to accept monthly installments?  Is her threat to garnish my paycheque an empty one.  I realise these people are trained to use a sort of psychological warfare to get you to pay up, but they have to be reasonable and understand my situation.

Just to make ARC woman happy I tried applying over the phone today for a bank loan from the Bank of Montreal, and I was rejected (as I predicted).  I set up an appointment with my local B of Montreal branch on Monday, just to talk to them about a loan, in person.  I doubt I will get one, but maybe they can actually give me a rejection letter that I can fax to ARC woman next week.

What are my rights in all of this?  Do I have to talk to ARC over the phone, or can I tell them that all further correspondence be done by mail?  I don't like talking to them, ARC woman interrupts me while I'm talking and I'm not in the mood for her bullying and BS. 

How do I get in touch with you?  The phone number at the cfwgroup link?  Will it cost anything for your help?