This section outlines bankruptcy in general terms. For specific information, please refer to the Common Manual.
Bankruptcy is defined as judicial action to stay the normal collection of debts against the petitioner, and cause those debts to be satisfied at the discretion of the court. Bankruptcies are classified as “chapters,” which refer to the parts of a larger volume—the U.S. Bankruptcy Act. Types of bankruptcies include:
- Chapter 7 – This is the most common form of bankruptcy, often referred to as “liquidation.” In a Chapter 7 bankruptcy, the eligible assets of the borrower are liquidated and distributed among the creditors by a trustee, with preference given to secured creditors. This type of bankruptcy is frequently used by borrowers who are unemployed or have few or no assets.
- Chapter 11 – A bankruptcy in which the borrower’s debts are reorganized. This type of bankruptcy is seldom used by student borrowers and is most often used by financially troubled businesses.
- Chapter 12 – Chapter 12 bankruptcy, which is similar to a Chapter 13, applies only to certain farms and family operations with specific debt ceilings.
- Chapter 13 – This is commonly referred to as the “wage earner” plan. A Chapter 13 bankruptcy allows individuals with regular incomes to satisfy their debts through a court-directed payment plan. Usually, the Chapter 13 debtor(s) has significant debts, but sufficient income to eventually pay the debts.
Generally, student loans are not dischargeable due to bankruptcy. However, if a borrower qualifies for the bankruptcy discharge, the loan holder is reimbursed for the unpaid principal and interest on the borrower’s loan(s), but the borrower is not reimbursed for any payments made on the loan(s) prior to discharge.
A lender may learn of a borrower’s bankruptcy by the borrower, but must make its determination to file a claim based on the receipt of the Notice of the First Meeting of Creditors (the Notice) or other proof of filing from the borrower’s attorney or the bankruptcy court (either directly from the court or from another source).
If the lender is notified that a borrower has filed a petition for relief in bankruptcy court, the lender must immediately suspend any collection efforts against the borrower that are outside the bankruptcy proceeding. If the borrower filed a Chapter 12 or 13, the lender must also suspend collection efforts against any co-maker or endorser. Suspension of collection efforts against any co-maker or endorser is optional if the borrower filed a Chapter 7 or 11.
Filing a Proof of Claim
A lender must file a proof of claim with the bankruptcy court no later than 30 days after it receives the Notice, unless the Notice specifically states that a proof of claim is not required. If required the proof of claim must be filed, even if a default claim has already been filed on the loan and the lender has not yet received payment. If a proof of claim is required, the lender must immediately forward a copy of the bankruptcy notification, proof of claim, and an original assignment of the proof of claim to the guarantor. (ISAC does not require the lender to file the proof of claim.)
ISAC does not require the lender to file the proof of claim.
Timely Filing Deadlines
A bankruptcy claim and proof of claim (if applicable) must be filed with all required documents within 30 days after the lender’s receipt of the Notice or other confirmation issued by the debtor’s attorney or the bankruptcy court or within 30 days after the date the guarantor provides the lender with bankruptcy information and instructs the lender to file a bankruptcy claim, whichever is earlier.
If the borrower files an adversary complaint, the bankruptcy claim and proof of claim must be filed with all required documents within 15 days after the lender's receipt of the summons and complaint or within 15 days after the date the guarantor provides the lender with adversary information and instructs the lender to file a bankruptcy claim, whichever is earlier.