Chapter 7 Bankruptcy Impact FAFSA Loan or Pell Grant Application

Federal Bankruptcy Law (FBL) 11 U.S.C. 525 is a section that prohibits any federal agency that provides loans and or grants to discriminate or show bias against an applicant because that applicant has had a bankruptcy in his or her recent past.  The bankruptcy discharge likely has put the former debtor into a better financial position and FAFSA loans and Pell Grants are both given based on financial need of the applicant.  The bankruptcy discharge has also put the debtor’s credit score in a final state of dire straits.  This makes getting non-federal loans and grants near impossible except for higher rates.  This situation may help one’s pursuit of FAFSA – Pell grant monies.   Regardless of your financial state, all FAFSA and Pell application rules apply to the applicant without reservations.  Several people who have had bankruptcies in their past have complained that FAFSA and Pell monies have been denied them because of an agency bias against bankruptcies.  Many of these denied people also spoke of difficulties getting an answer to why the Pell had been denied.  Their words yelled their anger at the situation. However, as many people if not more told of having to be calm and persistent in getting through to a FAFSA – Pell associate who could and would assist the caller with his or her dilemma.  Not so strangely enough many of the snafus were paperwork and calculations.

One area of information that was interesting was around the fact the federal agencies will likely deny additional student loans to applicants who have existing student loans that are in arrears.   Even the federal government has some rules in its agencies that prevent, or at least slow down the giving of good money after bad.  The sage adage that every situation is different and each situation is evaluated on its own merits is very true in the seemingly mysterious cloud that is FAFSA and Pell.

Just as a note, student loans, especially those from federal agencies, are typically excluded from Chapter 7 and 13 discharges.  This means that typically student loans must be paid off in full by the debtor.  In Chapter 13 the payment plan is three to five years, yet the student loans are typically excluded from the payment plan.  The use of the word “typically” in the previous sentences is important because in those cases where severe hardship on a person and or family, with a specific petition to the bankruptcy courts, student loans can be part of a Chapter 7 and or 13 discharge.  It is very unusual, but many experts mentioned actual experiences in some of these instances.   The courts and trustees do a very detailed evaluation of the debtor’s situation before deciding on the petition.  Also, one must remember that one can only apply for Chapter 7 bankruptcy relief every six years whether discharged or dismissed.

A suggestion many people made was to search for scholarships and grants from colleges and groups.  Many of these are slated for those talented collegians-to-be who have severe financial difficulties.   Many are available, free to apply for, and all they can say is, “No.”  One is no worse off for the attempt.

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