If a borrower files for bankruptcy, Prosper puts the account in a bankruptcy status. No further monthly loan payments are collected, any collection activity on the account ceases, and Prosper files the necessary paperwork with the bankruptcy court to prove the Prosper lenders’ claim. The amount of the claim is the amount owed on the loan as of the date the bankruptcy petition is filed.
Whether any further payments will be made or received on a loan after a bankruptcy is filed depends on the borrower’s particular financial situation. If the borrower has excessive debt and insufficient income, the borrower’s debts will most likely be discharged and extinguished without the borrower making any further payments on the loan or on any of the borrower’s other general unsecured debts.
If the borrower has regular income and a manageable amount of debt, the borrower will make payments to the bankruptcy trustee through a court-approved monthly payment plan. Payment plans normally run for 3 to 5 years, and may or may not provide for amounts to be applied toward the borrower’s unsecured debts; depending on the borrower’s financial situation, payment plans might provide for unsecured creditors to get nothing, or they might provide for unsecured debts to be paid in full. With payment plans that do call for amounts to be paid toward unsecured debts, monthly plan payments will not begin for over 6 to 12 months from the date the bankruptcy is filed. Prosper will forward any monthly amounts received under payment plans to the Prosper lenders.
This means that when a borrower files for bankruptcy, the account is in a holding pattern until the bankruptcy court determines how the Prosper loan is to be treated in the bankruptcy. If no further payments are to be made, Prosper will put the loan in a default status. If a payment plan is established which calls for monthly payments toward the loan, Prosper will forward plan payments as they are received to the Prosper lenders. In either case, Prosper lenders will receive the maximum possible amount recoverable on the loan. Loans that are in bankruptcy will not be sold in a debt sale.
If a bankruptcy is dismissed, regular collection activity will resume until the account is either cured, settled or included in a debt sale.
If the borrower who files for bankruptcy chooses to reaffirm the Prosper loan, servicing will continue as usual. Reaffirmation is an agreement by a borrower to reaffirm (pay) debts that would otherwise be included in the bankruptcy. People who file for bankruptcy are not required to reaffirm any debts; the decision to reaffirm a debt is voluntary on the part of the borrower.
Bankruptcies are reported to the credit bureaus, and have a negative impact on a borrower’s credit and credit score. Bankruptcies appear on a borrower’s credit report for 10 years.