Can You Get Financial Aid While in Chapter 13?
Understand the pathways to obtaining student financial aid while actively managing a Chapter 13 bankruptcy plan.
Chapter 13 bankruptcy provides a structured repayment plan for individuals with regular income, allowing them to manage their debts over three to five years. For many, pursuing higher education offers a path to improved financial stability and career prospects. Many individuals in Chapter 13 worry their bankruptcy status will hinder access to financial aid for educational pursuits.
Understanding Federal Student Aid Eligibility
Federal student aid eligibility generally requires that an applicant be a U.S. citizen or eligible non-citizen, possess a valid Social Security number, have a high school diploma or its recognized equivalent, and maintain satisfactory academic progress. A Chapter 13 bankruptcy filing does not automatically disqualify an individual from receiving most forms of federal student aid, such as Pell Grants, subsidized, or unsubsidized Direct Loans. Federal law, specifically 11 U.S.C. § 525(c), protects individuals from being denied federal grants, loans, or work-study solely due to a bankruptcy filing.
However, a Chapter 13 bankruptcy can impact eligibility for certain types of federal aid, particularly PLUS Loans (Parent PLUS and Grad PLUS Loans), which are subject to a credit check. An “adverse credit history” can lead to a denial for these loans. This includes being 90 or more days delinquent on any debt, having over $2,085 in total debt in collections or charged off within the last two years, or having a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or default determination within the last five years. If a Chapter 13 bankruptcy discharge occurred within the five-year look-back period, it could trigger this adverse credit flag for PLUS Loans. Borrowers may still qualify for PLUS Loans despite an adverse credit history by documenting extenuating circumstances or by obtaining an endorser who does not have an adverse credit history.
The Role of Your Bankruptcy Trustee
When an individual in Chapter 13 bankruptcy seeks to incur new debt, including student loans, the bankruptcy trustee plays a significant role. Chapter 13 requires debtors to adhere to a court-approved repayment plan, and during this period, new debt cannot be taken on without the trustee’s approval. This requirement applies to student loans, whether federal or private.
The trustee ensures any new debt does not jeopardize the Chapter 13 repayment plan. To gain approval, the debtor must demonstrate the student loans are necessary for their education and will improve their long-term financial situation, increasing their ability to complete the Chapter 13 plan and repay future obligations. For larger federal PLUS loans or private loans, court approval may also be required in addition to the trustee’s consent. Consulting a bankruptcy attorney can help navigate this process, as they can prepare the necessary motion explaining why the loan is essential and how it aligns with the Chapter 13 plan.
Applying for Financial Aid While in Chapter 13
Applying for federal student aid while in Chapter 13 bankruptcy involves completing the Free Application for Federal Student Aid (FAFSA). The FAFSA generally does not ask specific questions about bankruptcy filings, allowing individuals to submit it and qualify for aid.
Communicate openly with the college financial aid office about your Chapter 13 status. While the FAFSA may not delve into your bankruptcy specifics, direct communication helps the financial aid office provide tailored guidance and inform you of any required documentation. This might include a letter from your bankruptcy trustee or the bankruptcy court confirming your status and approval to take on new educational debt. The financial aid office can then assist in clarifying eligibility and navigating any institutional requirements.
Financial Aid Options and Repayment During Chapter 13
Individuals in Chapter 13 bankruptcy can pursue various financial aid options. Grants do not require repayment. Grants are awarded based on financial need and do not consider credit history, making them accessible even with a bankruptcy on record. Federal student loans, such as Direct Subsidized and Unsubsidized Loans, are also available, as eligibility for these loans is not credit-based. Private student loans, however, are more challenging to obtain during Chapter 13 due to credit score requirements, often necessitating a creditworthy co-signer.
New student loan debt acquired during Chapter 13 is treated within the bankruptcy plan. While student loans are difficult to discharge in bankruptcy without proving “undue hardship,” Chapter 13 can help manage these obligations. During the Chapter 13 repayment period, student loan payments may be included in the overall plan payments made to the trustee. This can reduce or delay direct student loan payments, offering financial relief. Interest on student loans continues to accrue during the Chapter 13 period.
Upon completion of the Chapter 13 plan, any non-discharged student loan balances remain due, and the lender will recalculate payments based on the remaining balance. For federal student loans, income-driven repayment (IDR) plans are an option for managing repayment post-bankruptcy. These plans adjust monthly payments based on income and family size, resulting in payments as low as $0 per month. IDR plans also offer the possibility of loan forgiveness after a certain number of years, typically 20 or 25 years of payments, depending on the plan. While recent legal challenges have created some uncertainty around certain IDR plans, they remain a path for managing federal student loan debt.