Bankruptcy is a condition in which debtors declare that they cannot honor their debts.
There are different types of bankruptcy (Chapters 7, 11, 13). The bankruptcy declaration negatively affects debtors' credit rating for 7 to 10 years, depending on the bankruptcy type.
How does bankruptcy affect the AR process?
When bankruptcy is declared, the court determines if and how creditors will be paid. During bankruptcy, the university may not attempt collection (which includes sending the customer a statement) until the case has been resolved by the Court. If a customer in bankruptcy attempts to pay a department directly for any amounts due under the bankruptcy, the department should refuse to accept payment and refer their customer to their bankruptcy attorney, or to the bankruptcy coordinator. Once a debtor files for bankruptcy, the Court must approve all payments on debts covered by the court’s proceedings. Any payment received from the Court (as opposed to the debtor) may be accepted and forwarded to the Cashier’s Office for posting to KFS or Banner.
What happens during bankruptcy?
The following steps occur during the bankruptcy process:
- Your department forwards bankruptcy notices (or any documents subsequent to the notices) immediately to Attn: “Bankruptcy Coordinator” in Student Accounting. This is true even if the debtor is a non-student.
- The bankruptcy coordinator files the necessary documents with the Court and updates the customer's record as follows:
- For KFS customers, the bankruptcy coordinator marks the customer with the chapter of the bankruptcy code (i.e., 7, 11, or 13).
- For Banner customers, the bankruptcy coordinator marks the customer BK (regardless of bankruptcy chapter) and removes any service holds (transcripts, diplomas, etc.) which may be on the student record.
- If the court proposes that the debtor repay the outstanding receivables at less than 100%, Student Accounting reviews its options. If it seems there may be room for negotiating, the bankruptcy coordinator contacts your department to see if it wants to retain counsel to oppose the debtor’s plan. (This applies to Banner and to KFS customers)
- After the bankruptcy case has been discharged or dismissed, the bankruptcy coordinator:
- executes the court’s instructions (i.e., resumes billing the debtor or writes off the debt as uncollectible)
- removes the bankruptcy flags on the customer record
- reinstates any service holds in Banner that survive bankruptcy
- informs any departments we had to charge for bad debt
- If the Court indicates that the billing statement process can resume, Student Accounting generates the billing statements for Banner customers, and your department generates billing statements for KFS customers.
Can my department initiate new business with a customer in bankruptcy?
Yes, policy permits departments to initiate new business with a customer in bankruptcy. However, carefully weigh the risks of doing this. Consider requiring advance payment or cash-only.