Maintained for Historical Purposes

This resource is being maintained for historical purposes only and is not currently applicable.

Federal Perkins Loan Program - Bankruptcy

AwardYear: 1995-1996
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 9
SectionTitle: Bankruptcy
PageNumbers: 99-102


For the best advice on how to proceed when a borrower files for
bankruptcy, schools should consult an attorney. The basic actions a
school must take are covered here, in "Dear Colleague" letter
GEN-90-41, dated December 1990, and in Section 674.49 of the
November 30, 1987 regulations as amended by the regulations
published in the Federal Register on July 21, 1992 and November
30, 1994.

[[Stop collection outside bankruptcy proceedings]]
If the school receives notice that a borrower has filed for bankruptcy,
it must immediately stop collection efforts (outside the bankruptcy
proceeding itself). If the borrower has filed under Chapter 12 or 13
of the Bankruptcy Code, the school must also suspend collection
efforts against any endorser for loans made prior to July 23, 1992.

[[Proof of claim]]
The school must file a proof of claim in the bankruptcy proceeding
unless, in the case of a proceeding under Chapter 7 of the
Bankruptcy Code, the notice of meeting of creditors states the
borrower has no assets.

[[Changes in bankruptcy law reflected in 7/21/92 regulations]]
Section 674.49 of the regulations published in the Federal Register
on July 21, 1992 includes the provisions of the Crime Control Act
of 1990 that extend from 5 years to 7 years the period of time in
which a borrower cannot have a loan discharged for chapter 7, 11,
12, and 13 bankruptcies, and provide that an SFA loan is
dischargeable during that same 7-year period only if the borrower
proves that repayment would constitute an undue hardship. The
July 21, 1992 regulations also reflect the changes made to the
Bankruptcy Code by section 3007 of the Omnibus Budget
Reconciliation Act of 1990; the regulations provide that a
discharge under 1328(a) of the Bankruptcy Code does not
discharge an education loan unless the loan entered the repayment
period more than 7 years, excluding periods of deferment, before
the filing of the petition.

PROCEDURES WHEN BORROWER REQUESTS DISCHARGE
BASED ON UNDUE HARDSHIP

If a borrower files for bankruptcy requesting discharge of a loan on
the ground of undue hardship under Chapter 7, 11, 12, or 13 of the
Bankruptcy Code, or under 11 U.S.C. 1328(b), the school must
follow the procedures discussed below.

If the loan has been in repayment for 7 years or more (excluding
deferment periods), the school may not oppose a discharge that has
been requested on the ground of undue hardship.

If the loan has been IN REPAYMENT FOR LESS THAN 7
YEARS, the school must determine, on the basis of reasonably
available information, whether repayment under the current
repayment schedule or under any adjusted schedule would impose
undue hardship on the borrower and his or her dependents. If this
would not be the case, the school must then decide whether the
expected costs of opposing the discharge would exceed one-third of
the total amount owed on the loan (principal, interest, late charges,
and collection costs). If the expected costs do not exceed one-third of
the total amount owed on the loan, the school must oppose the
discharge and, if the borrower is in default, seek a judgment for the
amount owed. The school may compromise a portion of that
amount, if necessary to obtain a judgment.

When a borrower has filed a request for discharge on the ground of
undue hardship, if the school is required under the steps described
above to oppose the borrower's request, the school may file a
complaint with the court to obtain a determination that the loan is
not dischargeable and to obtain a judgment on the loan.

PROCEDURES WHEN BORROWER REQUESTS ADJUSTMENT
IN REPAYMENTS

Under Chapter 13, the borrower may request an adjustment in
repayments. The borrower proposes a repayment plan, which is then
ruled on by the bankruptcy court. If the borrower's repayment plan
proposes full repayment of the loan, including all principal, interest,
late charges and collection costs on the loan, no response from the
school is required. The school is also not required to respond to a
proposed repayment plan that does not include any provision in
regard to the loan obligation or to general unsecured claims.

If the borrower proposes to repay less than the total amount owed,
the school must determine, from its own records and court
documents, the amount of the loan dischargeable under the plan.
The school does this by subtracting the total proposed payments
from the total amount owed.

The school must also determine from its own records and court
documents whether the borrower's proposed repayment plan meets
the requirements of 11 U.S.C. 1325.*1* Two of those requirements
are particularly relevant:

- First, the amount to be paid under the plan must at least equal
the amount the school would receive if the debtor had filed
under Chapter 7 rather than under Chapter 13.

- Second, the debtor must use all income not needed to support
him/herself and dependents to pay creditors under the plan.

If the borrower's proposed repayment plan does not meet the
requirements of 11 U.S.C. 1325, the school must object to the
confirmation by the court of the proposed plan, unless the cost of
this action will exceed one-third of the dischargeable loan debt; if
the cost will exceed one-third of the dischargeable debt, the school is
not required to take this action.

Also, when a borrower proposes to repay less than the total amount
owed, the school must determine whether grounds exist under 11
U.S.C. 1307*1* for the school to move to have the Chapter 13 case
either dismissed or converted to a Chapter 7 proceeding. Such
grounds include a borrower's failure to (1) begin payments under the
plan within the required time (usually 30 days from the date the plan
is filed), (2) file a proposed plan in a timely manner, or (3) pay
required court fees and charges. If the school determines that such
grounds do exist, the school must move to dismiss or convert the
Chapter 13 case to a Chapter 7 proceeding, unless the cost of this
action will exceed one-third of the dischargeable loan debt.

[[School must monitor borrower's compliance]]
After a borrower's proposed repayment plan is confirmed by the
court, the school must monitor the borrower's compliance with the
repayment plan. For a loan that entered repayment more than 7
years before the borrower filed for bankruptcy (excluding periods of
deferment), if the school determines from its own records or court
documents that the borrower either has not made the payments
required under the plan or has filed for a hardship discharge under
11 U.S.C. 1328(b),*1* the school must determine whether grounds
exist under 11 U.S.C. 1307 to dismiss the case filed under Chapter
13 or to convert the Chapter 13 case to a Chapter 7 proceeding, or
whether the borrower is entitled to a hardship discharge. If grounds
do exist under 11 U.S.C. 1307 to dismiss or convert a Chapter 13
case, the school must move to convert or dismiss the case, and if a
borrower has not demonstrated entitlement to a hardship discharge
under 11 U.S.C. 1328(b), the school must oppose the hardship
discharge request, unless the costs of these actions, when added to
those already incurred, would exceed one-third of the dischargeable
debt.

[[Resuming billing and collection if loan is not discharged]]
A school must resume billing and collection procedures after the
borrower has received a discharge under 11 U.S.C. 1328(a) or
U.S.C. 1328(b) unless (1) the court has found that repayment would
impose an undue hardship or (2) the loan entered the repayment
period more than 7 years before the filing of the petition and the
borrower's plan made some provision regarding the borrower's loan
obligation or general unsecured debts. For more information, see
Section 674.49(f) of the July 21, 1992 regulations.

[[Agreement to repay loan discharged in bankruptcy no longer required]]
As stated earlier, a borrower is no longer required to establish
eligibility for a new student loan by agreeing to repay a loan
discharged in bankruptcy. As a result of the Bankruptcy Reform Act
of 1994, effective October 22, a student may not be denied student
financial assistance from SFA programs, including the Federal
Perkins Loan Program, solely on the basis of a bankruptcy
determination. If a student has filed for or received a discharge in
bankruptcy, has had a student loan discharged in bankruptcy, or has
not paid a student loan that has been determined by a court of law to
be dischargeable in bankruptcy, the bankruptcy may be considered
as evidence of an adverse credit history but cannot be the basis for
denial of a future loan from the Federal Perkins Loan or other
student loan programs. However, schools may continue to consider
the student's post-bankruptcy credit history in determining
willingness to repay the loan.

*1* 11 U.S.C. 1307, 1325, and 1328(b) are laws applicable to
bankruptcy cases in general, not just to Federal Perkins Loan
bankruptcy cases. 11 U.S.C. 1307 concerns the dismissal of a
Chapter 13 case or the conversion of a case filed under Chapter 13
to a Chapter 7 proceeding. 11 U.S.C. 1325 concerns the
confirmation by the court of a borrowerÂ’s proposed repayment plan.
11 U.S.C. 1328(b) concerns the discharge of debts. As stated
previously, for best advice on how to proceed when a borrower files
for bankruptcy, schools should consult an attorney.