One of the questions I hear from parents, college students, and even grandparents helping to pay for college is:

“If I file bankruptcy, will my children—or I—still be able to get student loans or financial aid?”

The short answer is:

In almost every case, filing bankruptcy will not prevent you from receiving federal student loans or federal financial aid.

That answer surprises many people.

I think one of the biggest myths about bankruptcy is that it somehow locks every financial door for years to come. In reality, bankruptcy is often the very thing that allows families to regain enough financial stability to continue their education.

Bankruptcy Does Not Automatically Disqualify You from Federal Student Aid

Federal student aid programs generally do not deny assistance simply because you filed a Chapter 7 or Chapter 13 bankruptcy.

This includes many of the most common forms of financial aid, including:

• Federal Direct Student Loans
• Pell Grants
• Federal Supplemental Educational Opportunity Grants (FSEOG)
• Federal Work-Study
• PLUS Loans (subject to separate credit standards)

If you otherwise qualify, bankruptcy alone is generally not a reason to deny federal aid.

In fact, when completing the FAFSA (Free Application for Federal Student Aid), there isn’t a question asking whether you have filed bankruptcy.

Sometimes Bankruptcy Can Actually Help

This may sound backwards.

Many of my clients have spent years juggling overwhelming credit card debt, medical bills, payday loans, lawsuits, and wage garnishments.

All of that financial pressure leaves very little money available for tuition or books.

After a successful Chapter 7 bankruptcy, many people suddenly find they have:

• More disposable income
• Less financial stress
• Better monthly cash flow
• The ability to focus on education rather than debt collectors

I’ve had clients tell me that filing bankruptcy finally allowed them to return to college, finish a degree, or help their children attend school.

What About Parent PLUS Loans?

Parent PLUS Loans are a little different.

Unlike most federal student loans, these loans do include a credit review.

However, a bankruptcy filing does not automatically mean you will be denied.

The Department of Education looks for certain adverse credit events during a specified look-back period. Even if a parent has adverse credit, there may still be options available, including:

• Obtaining an endorser (similar to a co-signer)
• Documenting extenuating circumstances
• Having the student qualify for additional unsubsidized federal loans if the PLUS loan is denied

Every situation is different.

What About Private Student Loans?

Private student loans work much like any other private loan.

Banks and private lenders establish their own underwriting guidelines.

A recent bankruptcy may make approval more difficult initially because lenders look at:

• Credit score
• Income
• Employment history
• Debt-to-income ratio
• Overall credit history

The good news is that bankruptcy often becomes the first step toward rebuilding credit.

Many of my clients are surprised how quickly they begin receiving credit offers after their bankruptcy discharge. While you should be cautious about taking on new debt, responsibly rebuilding your credit can improve your chances of qualifying for future financing, including private educational loans if needed.

Chapter 13 Is Different—but Usually Not a Barrier

If you’re currently in an active Chapter 13 case, obtaining new credit generally requires approval from the bankruptcy court or your Chapter 13 trustee.

That includes certain private student loans.

However, federal financial aid itself is generally a separate issue.

If you’re considering enrolling in school while in Chapter 13, it’s important to discuss your plans with your bankruptcy attorney before borrowing additional money.

Don’t Let Fear Keep You From Getting a Fresh Start

Over the years, I’ve met people who delayed filing bankruptcy because they believed it would ruin every opportunity their family had—including sending a child to college.

That simply isn’t true.

I’ve represented thousands of individuals throughout Michigan, and I’ve seen firsthand how bankruptcy often opens doors instead of closing them.

When overwhelming debt disappears, families can begin planning for the future again instead of just surviving the present.

Sometimes that future includes college.

Sometimes it includes graduate school.

Sometimes it’s a parent finally returning to school after putting education on hold for years.

My Advice

If you’re struggling with debt and are worried about how bankruptcy might affect financial aid, don’t rely on something you heard from a friend, read on social media, or were told years ago.

Bankruptcy law changes.

Student aid rules evolve.

Every family’s financial picture is different.

Spend thirty minutes talking with an experienced bankruptcy attorney before making assumptions that could cost you years of unnecessary financial stress.

You may discover that filing bankruptcy isn’t the obstacle you feared—it may be the solution that allows you or your children to move forward with your education.

Walter Metzen’s Perspective

One of the most rewarding parts of practicing bankruptcy law is seeing clients begin planning for their future again.

When people first walk into my office, they’re often consumed by collection calls, lawsuits, garnishments, and overwhelming debt. College plans, career goals, and dreams for their children have been pushed aside by financial survival.

Months later, after receiving their bankruptcy discharge, the conversations change. Instead of asking how they’re going to pay the next credit card bill, they’re asking about enrolling in school, helping a son or daughter through college, or pursuing a better career.

That’s what a fresh start is supposed to accomplish.

If bankruptcy gives you the breathing room to invest in your education or your family’s future, then it has done exactly what Congress intended it to do.

Education creates opportunity. Bankruptcy creates a fresh financial beginning. The two are not mutually exclusive—in many cases, they work hand in hand.