BANKUPTCY AND DISABILITY

1
BANKUPTCY AND DISABILITY

• SASFAA Annual Conference
• February 12-15, 2006
• Sheraton Four Seasons Hotel
• Greensboro, North Carolina
• Presented by Gregory Martin

2
Bankruptcy and Basic Eligibility

• Student with Title IV loan or grant overpayment
  remains eligible
• Borrowers do not need to reaffirm loans
  discharged in Bankruptcy to be eligible

3
Default/Overpayment and Bankruptcy

• Borrower with defaulted loan/grant overpayment in
  active bankruptcy
• Eligible only if able to provide documentation
  from holder of debt stating that debt is
  dischargeable
• Borrower with non-defaulted loan in active
  bankruptcy (collection stayed)
• Eligible as long as he/she has no loans in
  default

4
Eligibility After Bankruptcy

• Bankruptcy Reform Act of 1994 (PubL. 103-394)
• No denial of grant or loan to a person who has
  filed or received a discharge in bankruptcy
• 1998 Amendments to HEA
• Eliminates bankruptcy discharge to borrowers in
  repayment for 7 years borrowers must prove undue
  hardship

5
Eligibility After Bankruptcy

• Change in operational treatment for eligibility
  of borrowers who have filed for bankruptcy
• Direct Loans (DLB-04-14 May 2004, 04-17 June
  2004)
• No longer closing out MPNs for filing borrowers
  and requiring new MPNs no longer rejecting
  disbursements after filing
• Also applicable to FFEL and Perkins borrowers

6
Eligibility After Bankruptcy

• Changed approach based on decision that loans and
  disbursements under MPN are clearly identifiable
  by date before and after filing
• Filing borrowers in default remain ineligible
  without satisfactory repayment arrangements
  voluntary SRA does not violate stay of
  collections

7
Types of Bankruptcies

• Chapter 7 - Complete liquidation of all personal
  assets to repay debts
• Chapter 11 - Reorganization bankruptcy/plan filed
  with court to repay creditors (used mainly by
  business)
• Chapter 12 - bankruptcy for family farmers
• Chapter 13 Reorganization bankruptcy/plan filed
  with court to repay creditors (used mainly by
  consumers)

8
NSLDS Codes for Bankruptcy

• BC - Student is eligible
• No prior default
• Discharged in Bankruptcy
• BK - Student is eligible
• No prior default
• Active bankruptcy Claim
• DB Student not eligible
• Defaulted prior loan
• Active bankruptcy claim (Perkins all
  bankruptcies. FFEL and DL Cpt. 13)

9
NSLDS Codes for Bankruptcy

• DK - Student is eligible
• Defaulted loans discharged in bankruptcy (Perkins
  all. FFEL and DL Cpt.13)
• DO - Student not eligible
• Prior defaulted loans
• Active bankruptcy claim (FFEL and DL Cpts. 7, 11
  and 12
• OD Student is eligible
• Defaulted loan discharged in bankruptcy ( FFEL
  and DL Cpts. 7, 11 and 12)

10
ISIR Database Match

• ISIR Comment Number/Text
• 116 The National Student Loan Data System (NSLDS)
  indicates that you have one or more student loans
  in active bankruptcy status. Before you can
  receive additional federal student loans, you
  must contact your Financial Aid Administrator
• C Code generated

11
ISIR Database Match

• Comment Number 116 (Resolution Required)
• Student is eligible if not in default on a prior
  loan
• No more requirement to close out MPN (see Slide
  5)
• Student with default on a prior loan must provide
  documentation from loan holder that loan is
  dischargeable

12
Bankruptcy Code and Student Loans

• Student loans are non-dischargeable except where
  hardship can be proven
• Two categories of non-dischargeable student loans
  prior to Bankruptcy Abuse Prevention and Consumer
  Protection Act of 2005 (BAPCPA)
• BAPCPA adds a third category of
  non-dischargeable student loans

13
BAPCPA Basics

• Time between discharges - increased to 8 years
  for second Cpt .7 discharge
• Financial management class - debtor must
  complete course in personal financial management
  to get discharge
• High homesteads and bad acts - ceiling on amount
  discharged given conviction for certain crimes or
  owing certain debts
• Debtor Audits 1 of every 250 bankruptcies filed
  must be audited

14
Student Loans Under Prior Provisions

• Two categories of non-dischargeable loans
• Educational benefit overpayments or loans made,
  insured or guaranteed by a governmental unit or
  under a program funded in whole or in part by a
  governmental unit or nonprofit institution
• An obligation to repay funds received as an
  educational benefit, scholarship or stipend

15
New Provisions of 523(a) (8) Per (BAPCPA)

• Third category of non-dischargeable student loans
• Excludes from discharge all educational loans
  where the interest could have been deducted under
  IRS code (qualified education loan under Section
  221(d)(1) IRS Code of 1986)
• Protect lenders making loans with no connection
  to government

16
Discharging Student Loans Through Bankruptcy

• Borrower must file undue hardship petition
• Decision of judge whether to discharge loan
• Brunner v. New York State established precedent
  for undue hardship
• Debtor cannot repay loan and maintain minimal
  standard of living
• Situation likely to persist for significant
  portion of repayment period
• Debtor has made good faith effort to repay loans

17
Preventing Bankruptcy Loan Rehabilitation

• Borrower may rehabilitate a loan by making
  satisfactory repayment arrangements with the
  guarantor
• Borrower with a defaulted loan on which a
  judgment has been made may not include that loan
  in the rehabilitation agreement

18
Eligibility for Rehabilitation

• Borrower must make 12 consecutive, on-time
  payments full monthly payments (received within
  15 days of due date)
• Payments must be voluntary and equal to or less
  than amount determined to be reasonable and
  affordable
• Payments obtained by wage garnishments, federal
  treasury offsets etc. do not satisfy requirements
  for rehabilitation

19
Eligibility for Rehabilitation

• Lump sum prepayments of future installments do
  not satisfy the consecutive payment requirements
• Guarantor determines what constitutes a
  reasonable and affordable monthly payment

20
Deficit Reduction Act of 2005

• Number of payments to rehabilitate a loan is
  reduced from current 12 to 9 consecutive payments
  made within ten consecutive months
• Payments must be made within 20 days of due date
• Effective July 1, 2006

21
TPD Discharge basics

• Borrower claims discharge
• Lender must request certification of disability
  from physician
• Borrower must submit a completed Loan Discharge
  Application
• Suspension of collection
• If reliable information indicating TPD is
  received, lender may grant admin. forbearance up
  to 60 days until TPD certification received

22
General Requirements for TPD Discharge

• If a doctor of medicine or osteopathy certifies
  TPD borrower obligation to repay may be
  discharged
• Borrower considered TPD if
• Unable to work or earn money because of an
  illness or injury expected to continue
  indefinitely or result in death

23
TPD Discharge of Consolidation Loans

• Borrower must be certified as TPD for all
  underlying loans including non-FFEL loans
• Consolidation Loan married couple
• Portion of consolidation loan attributed to
  disabled borrower may be discharged

24
Conditional Discharge Due to TPD (On or After
July 1, 2002)

• TPD paid as a claim by guarantor are permanently
  assigned to the Department
• Department determines if certification and
  information from borrower support criteria for
  TPD discharge
• If application denied
• Department notifies borrower
• Loan is due and payable under existing MPN

25
Conditional Discharge Due to TPD

• If Department determines borrower is TPD
• Borrower notified that loan is conditionally
  discharged
• Conditional discharge period lasts 3 years after
  date borrower became TPD as certified
• Part or all of 3-year period may predate
  Departments initial determination

26
Conditions That Apply During 3-Year Conditional
Period

• Borrower not required to make payments on loan
• Borrower must notify Department of changes in
  address or phone number
• Borrower must notify Department if annual
  earnings from employment exceed 100 of poverty
  line for a family of two

27
Conditions That Apply During 3-Year Conditional
Period

• Borrower must provide Department (on request)
  with additional documentation or information
  related to his/her eligibility for TPD discharge
• Borrower must not receive a new loan under
  Perkins, FFEL or DL programs
• FFEL/DL consolidation loans not including loans
  in conditional discharge status allowed

28
3-Year Conditional Period Monitoring

• If any time during 3-year conditional period
  borrower no longer meets TPD discharge criteria
• Department resumes collection activity on loan
• Borrower not required to pay interest that
  accrued from date of initial determination
  through the end of the conditional discharge
  period

29
Post-TPD Discharge Eligibility

• November 1, 2000 Regulations changed eligibility
  for post-TPD Discharge borrowers
• Eligibility requirements vary depending upon date
  of TPD discharge
• Before July 1, 2001
• On or after July 1, 2001 and before July 1, 2002
• On or after July 1, 2002
• Refer to ISIR Codes and Comments

30
Post-TPD Discharge Eligibility

• Discharge before July 1, 2001
• Certification from physician that borrower can
  engage in substantial gainful activity (i.e., no
  longer TPD)(Note Need one per school)
• Borrower statement acknowledging no discharge of
  new loan for pre-existing conditions unless
  substantial deterioration
• (Note Need each loan)

31
Post-TPD Discharge Eligibility

• Discharge on or after July 1, 2001 and before
  July 1, 2002 with new loan request within 3 years
  of TPD date
• Physician certification
• Borrower Acknowledgment Statement
• Reaffirmation of discharged loan
• After 3 years from TPD date only certification
  and borrower acknowledgement required

32
Post-TPD Discharge Eligibility

• Reaffirmation
• If ISIR Discharge Date is within 3 years of new
  loan request, contact holder to identify 3 years
  from TPD date
• If reaffirmed, requires new promissory note or
  signed repayment schedule

33
Post-TPD Discharge Eligibility

• Reaffirmation
• Do not certify/originate before holder confirms
  reaffirmation
• If defaulted prior to discharge, reaffirmed loan
  retains default status and satisfactory repayment
  arrangements required

34
Post-TPD Discharge Eligibility

• Discharge on or after July 1, 2002
• If final discharge granted same as before July
  1, 2001
• If conditional discharge
• Physician certification and borrower
  acknowledgment for new loan

35
Post-TPD Discharge Eligibility

• Borrower acknowledgment that neither new loan nor
  conditionally discharged loan are dischargeable
  now or in the future based on pre-existing
  condition unless substantial deterioration
• Collection resumes on conditional loan and prior
  status applies

36
New FSA Loan for Student with TPD Discharge

• Must obtain physicians certification of ability
  to engage in substantial gainful activity
• Must sign statement that new FSA loan cannot
  later be discharged for present impairment unless
  it deteriorates so that borrower is again TPD

37
New FSA Loan for Student with TPD Discharge

• If loan conditionally discharged (on or after
  July 1, 2002) and 3-year period has not elapsed,
  borrower must sign statement that
• Collection will resume on the old loan (must
  begin before receipt of new loan)
• Old loan may not be discharged for any condition
  present when 3-year period began or when new loan
  is sought unless condition substantially
  deteriorates

38
ISIR Database Match

• ISIR Comment Number 115
• The National Student Loan Data System (NSLDS)
  indicates that one or more of your student loans
  have been discharged. If you have questions, see
  the Financial Aid Administrator at your school
• C Code generated
• Resolution is required

39
NSLDS Code for Disability

• DI Student is eligible
• Check ISIR Comment Number/Text

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The End Gregory P. Martin Training Officer, US
Department of Education 215-656-6452 Gregory.marti
n_at_ed.gov Acknowledgment This presentation
made use of some slides created by Pamela Moran
of the US Department of Education