Bankruptcy is a complicated issue that affects numerous areas of your life. But in general, filing for bankruptcy or having a chapter 13 doesn’t interfere with your eligibility to receive federal aid.Other types of assistance may not be available to you after filing bankruptcy, but it depends on both the type of bankruptcy for which you filed and the student loan programs to which you apply.
Regardless, you still need to fill out the Free Application for Federal Student Aid (FAFSA®) to make the process less complicated and confusing and always talk to the financial aid office at the universities you want to attend.
Receiving Federal Federal Aid
Bankruptcy alone cannot disqualify any student from grants or loans administered through Title IV, such as the Perkins Loan. Administrators are further forbidden from claiming that bankruptcies are evidence that a student is unwilling to pay back federal loans.
That being said, colleges and universities can — and do — look at your credit history and repayment behaviors following a bankruptcy filing.
Defaults May Be More Significant
Defaulting on a loan is a more significant problem than filing for chapter 13. The only exception is if you discharge the defaulted loan during the bankruptcy proceedings. Otherwise, you’re effectively blocked from receiving aid in the future until your loan is no longer in default.
That usually involves setting up a payment plan with the loan holder. In general, you have to make steady payments for nine months to a year and avoid late or missed payments. That means you have to wait up to a year before you’re eligible for federal aid and able to attend school again.
Credit Score vs. Bankruptcy
Some loans are unavailable to people with a bankruptcy in their history because of the effect it has on their credit score. Bankruptcy remains on your credit history for five years. As a result, anyone with bankruptcy who applies for a PLUS loan or a Grad PLUS loan may not qualify due to a tarnished credit score. It’s still possible to obtain approval for PLUS loans if the borrower can find someone who has a sterling credit history and a solid score to endorse them.
An undergraduate may have parents or guardians who apply for a PLUS loan and don’t qualify due to bankruptcy. In that case, the student may qualify to receive an unsubsidized Stafford loan for a higher amount.
Bankruptcy and Private Loans
Private loans, which aren’t offered through the federal government, operate under a different set of rules. In most cases, if you’re a student who’s declared bankruptcy, your best option is to talk to the financial aid administrator at the school you want to attend. The administrator can explain how the bankruptcy affects you in terms of assistance and steer you in the right direction to apply for private loans that are still available to you. Private lending institutions often look back seven to 10 years, not just five. Unless you can find someone with a strong credit history to cosign your loan, you’re largely out of luck.
The good news is that many financial institutions allow exceptions to the rule. For example, let the bank or lender know that you initiated the bankruptcy because of exorbitant medical costs, some type of natural disaster, or similar circumstances. There are also exceptions for bankruptcies that include a payout schedule.
Discharging Federal Aid Loans
Going through bankruptcy doesn’t automatically remove federal student loans. You have to prove that paying back your student debt will cause undue financial hardship that you can’t afford. Furthermore, you have to attend a school that participates in the Title IV programs that accept discharges.
In some cases, you have to file a petition proving undue hardship. Loans that are both awarded and guaranteed by nonprofit groups, FDSLP loans, and FFELP loans aren’t eligible for discharge unless a judge agrees that payback is a hardship.
