Maintained for Historical Purposes

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

Federal Perkins Loan Program - Bankruptcy

AwardYear: 1997-1998
EnterChapterNo: 6
EnterChapterTitle: Federal Perkins Loan Program
SectionNumber: 9
SectionTitle: Bankruptcy
PageNumbers: 101-104


The basic actions a school must take when a borrower files for
bankruptcy protection are covered her, in "Dear Colleague" Letter
GEN-95-40, dated September 1995, and in 34 CFR 674.49. For the
best advice on how to proceed when a borrower files for bankruptcy
protection, a school should consult its attorney.

[[Stop collection outside bankruptcy proceedings]]
If a school receives notice that a borrower has filed for bankruptcy
protection, 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. 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.

Provisions of the Crime Control Act of 1990 extended from 5 years
to 7 years the period of time a loan must be in repayment before it
can be discharged under chapter 7, 11, 12, or 13 of the Bankruptcy
Code and provided that a Student Financial Assistance (SFA) loan is
dischargeable during that same 7-year period only if the borrower
proves that repayment would constitute an undue hardship. The
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 and forbearance, before the filing of the petition.

WHEN BORROWER REQUESTS DISCHARGE BASED ON
UNDUE HARDSHIP

If a borrower files for bankruptcy protection 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 on the next page.

If the loan has been IN REPAYMENT FOR 7 YEARS OR MORE
(excluding deferment and forbearance 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 REPAYMENT

Under Chapter 13, the borrower may request an adjustment in
repayment terms. 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, to pay creditors under the plan, the debtor must use all
income not needed to support himself or herself and his or her
dependents.

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 (see footnote on previous page) 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.

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) (see footnote on previous page), 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. 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.

[[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, 1994, 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 Perkins Loan Program 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 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. A school should consult an
attorney for the best advice in bankruptcy cases.

Last Modified: 07/20/1998