Consumer bankruptcy filings for 2005 totaled more than 2 million, an increase of nearly 32 percent compared with 2004 and the highest number of filings on record. One in every 53 households filed bankruptcy in 2005. With these statistics from Lundquist Consulting Inc. and Consumer Affairs in mind, financial aid administrators should be armed with knowledge about how bankruptcy can affect education loans and other financial aid. USA Funds® University notes the following key facts:

• The types of bankruptcy are chapters 7, 9, 11, 12, 13 and 15. The most-common types of bankruptcy are chapters 7 and 13. Chapter 7 calls for liquidation of assets, while Chapter 13 calls for repayment of the debts.
  
  
• Debts discharged in bankruptcy are not considered income and are not included on the Free Application for Federal Student Aid.
  
  
• Education loans generally are not dischargeable under any bankruptcy chapter. This rule previously applied only to federal education loans. Following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, however, effective Oct. 17, 2005, the rule also applies to private education loans.
  
  One exception exists to the provision prohibiting discharge of student loans in bankruptcy: If borrowers prove in court that loan repayment will cause an undue hardship, the court may discharge their education loans.
  
  
• Overpayment on educational benefits, such as Pell Grants, also are not dischargeable in bankruptcy.
  
  
• Education lenders must abide by the automatic-stay provision of the U.S. Bankruptcy Code, which prohibits any collection efforts during a pending bankruptcy. Post-petition debts are not subject to the terms of the automatic-stay provision, however. In the case of loans that are 270 days or more delinquent, but no default claim has yet been filed when the lender receives notification of the bankruptcy filing, lenders must file the loans as default claims with the guarantors and submit a Proof of Claim and an Assignment of Claim to the court to advise of the transfer of the debt.
  
  
• Lender procedures for handling loans involved in Chapter 7 or 11 proceedings differ from those for loans in Chapter 12 or 13. For loans involved in chapter 7 or 11 filings, lenders must hold the loans—usually in a forbearance status—until the bankruptcy action concludes. An exception to this rule is in the case of a petition for undue hardship, sometimes called an adversary complaint. If borrowers file petitions for undue hardship under a chapter 7 or 11 bankruptcy, the lender must file a bankruptcy claim with the guarantor.
  
  In the case of loans involved in chapter 12 or 13 filings, lenders must file bankruptcy claims with the guarantor and file POCs, along with an Assignment of Claim, with the court.
  
  
• Guarantors also must abide by the automatic-stay provision on defaulted loans in addition to filing POCs and necessary objections, and defending any undue hardship (adversary filing) involving the loans.
  
  
• In the case of non-discharged loans in good standing prior to bankruptcy-petition filings, guarantors must sell these loans back to the appropriate lenders when the bankruptcy proceeding is complete.

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