Understanding Bankruptcy Statuses on Student Loans

When a student borrower files for bankruptcy, their loan status and billing activity may change temporarily or permanently depending on the outcome of the case. This article explains what schools can expect when a student’s loan is affected by bankruptcy and how Climb manages these situations.


Why would a student’s status show “Bankruptcy” and then return to “Repayment”?

If a student’s bankruptcy case is dismissed or discharged by the court (meaning the bankruptcy is over and the borrower is no longer protected by the automatic stay), Climb removes the bankruptcy alert from the loan.

At that point, the loan returns to whatever status it was in prior to filing — typically Repayment — and billing resumes as normal.


What happens when a student files for bankruptcy?

When a borrower files for bankruptcy, several key steps occur:

  1. Filing:
    The borrower (debtor) submits a bankruptcy petition.

    • Sometimes Climb receives notice directly from the court or borrower.

    • In other cases, the loan servicer receives it first and manages the process from there.

  2. Automatic Stay:
    Immediately after filing, an automatic stay takes effect.

    • This halts all collection activity — we are legally prohibited from attempting to collect payments.

    • The loan is placed on a postponement and shown as current or On Track during this period.

  3. Administration:
    The bankruptcy court and a trustee oversee the case.

    • During this time, Climb does not contact the borrower or require payments.

    • Any payments made are strictly voluntary.

  4. Discharge:
    At the end of the case, the court may issue an Order of Discharge, releasing the borrower from the obligation to repay certain debts.

    • However, most student loans (especially those originated from Title IV–funded schools) are non-dischargeable under bankruptcy law.

    • In these cases, the loan will return to Repayment once the process concludes.


What does “Order Discharged” mean, and what will the loan status show?

When the court issues an Order of Discharge, the borrower is no longer legally required to pay the debts covered by that discharge.

If the student loan is discharged in bankruptcy, the loan will show as:

Status: Uncollectible – Charge Off

This means the loan has been charged off, and payments are no longer being collected.


What happens if the bankruptcy filing ends without a discharge?

If the court dismisses the case or determines that the student loan is not dischargeable, the bankruptcy status is removed and the account returns to its prior status.

  • The loan resumes Repayment, and billing restarts.

  • Days past due may accumulate again if payments are not made.


What should schools expect when a student files for bankruptcy?

Here’s what typically happens from a school’s perspective:

  • Immediate payment halt: Once the bankruptcy is filed, the automatic stay prevents any collection activity, and payments stop.

  • Extended non-payment period: During the case, loans remain non-performing with no active collection, even though the debt is still owed.

  • Post-bankruptcy collections:

    • If the bankruptcy concludes without discharge, the account often has 120+ days of non-payment.

    • It will automatically transfer to collections per Climb’s standard delinquency protocols.

  • Collection challenges:

    • Many borrowers emerging from bankruptcy still face financial difficulties.

    • However, with TCM servicing, schools may still see some recovery as dismissed borrowers resume payments similar to other delinquent accounts.

 

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