How to Get Financial Aid After Filing Bankruptcy

Bankruptcy can’t stop you from getting financial aid, but it can make it harder for you to borrow loans to return to grad school or pay for your child’s education.

Filing bankruptcy does a lot of things. It wipes out credit card debt, medical bills, personal loans, and so on. It stops foreclosures, auto repossessions, and wage garnishments. It halts collection calls and most lawsuits. All of those benefits come at a cost. Your credit score will take a hit. And if you file a Chapter 13 bankruptcy case, you’ll have to make payments to the bankruptcy court and your creditors for several years.

The one thing bankruptcy doesn’t do is block you from getting new financial aid.

Federal law prohibits the U.S. Department of Education from rejecting your FAFSA application because you filed for bankruptcy. As a result, you can get new Pell Grants, work-study money, and most federal student loans during or after your case.

But here’s where things get tricky: The department can require you to get an endorser or cosigner if you’re seeking to borrow a Parent or Grad PLUS Loan and have an adverse credit history.

Related: Can I Get a Student Loan After Filing Chapter 7 Bankruptcy?

Many bankruptcy filers won’t experience an issue getting federal student aid like Pell Grants, work-study, and Direct Stafford Loans. The Bankruptcy Code prohibits the Education Department and other federal agencies with a student loan program from discriminating against people simply because they filed bankruptcy.

Although most people will get financial aid without a hitch, graduate students and parents may face hurdles in qualifying for Federal PLUS Loans due to a policy unique to those types of loans. The U.S. Department of Education doesn’t check the credit scores of students borrowing loans for undergraduate programs. But it does pull the credit reports for parents looking to borrow PLUS Loans and students looking for help paying for grad school.

The department checks to see if the applicant has any delinquencies, garnishments, collection accounts, or a recent bankruptcy discharge. If it finds one of those things, the department will demand that the borrower add an endorser to the loan application.

Another issue is if you filed Chapter 13 bankruptcy and your case hasn’t ended when you apply for financial aid. Bankruptcy law forces you to ask the trustee and the bankruptcy court before you can take on any type of debt, including student loans. That said, it’s possible to borrow Parent PLUS Loans during Chapter 13. Check with your bankruptcy attorney about the steps you’ll need to take before accepting a financial aid package that includes borrowing student loan debt.

Related: What Happens to Private Student Loans in Chapter 7?

You can get a Pell Grant no matter which type of bankruptcy you file. Eligibility for the grants is tied to your financial situation — not your credit score or any negative marks on your credit report. The federal government awards the grant to students whose families earn less than $60 thousand per year, according to the Washington Post.

Related: Do You have to Fill Out the FAFSA Every Year?

By itself, bankruptcy won’t stand in the way of you getting financial assistance for school. But if you’re in default on a federal student loan, you’ll need to bring the loan current by applying for consolidation or enrolling in the loan rehabilitation program. Otherwise, you can try your luck at discharging the debt in your bankruptcy case.

Using bankruptcy to clear student loan debt is challenging. You have to file a separate lawsuit against your lenders, known as an adversary proceeding, where you ask the judge to wipe out your education loans because you can’t keep up with the monthly payments and maintain a minimal standard of living for yourself and your dependents.

Related: How to Prove Undue Hardship for Student Loans

You might look at your student loan balance and compare it to your income and think you have a good shot of winning your case. But you’d be wrong. The process is much more complicated than that.

You’ll need to pass a test — usually the Brunner Test — that shows, among other things, you made a good-faith effort to make your student loan payments before declaring bankruptcy.

Speak with your bankruptcy lawyer or a student loan bankruptcy lawyer about how these types of bankruptcy proceedings work.

Learn More: Can Student Loans Be Discharged in Bankruptcy?

Student loan borrowers can get financial aid while in Chapter 7 or Chapter 13 bankruptcy or even after their case ends. But they may have trouble qualifying for PLUS Loans on their own. They may need to ask a family member or loved one to endorse their application.

Speak with a financial aid administrator at your school if you have questions about bankruptcy and student loans. You can also schedule a call to talk with me. During that call, we’ll go over your options to help pay for school, including understanding the interest rate you can expect to get. We’ll also review repayment plans, deferment and forbearance opportunities, and loan forgiveness programs you may be eligible for.