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Does Mom’s Chapter 13 Bankruptcy Affect Son’s Financial Aid?

February 6, 2013

A financial aid package for an independent student is based on the student’s own income, which is usually quite low, rather than parents’ income, which is often much higher. Independent student status can mean federal grant opportunities which do not need to be repaid rather than loans. Unfortunately, neither living alone nor filing a separate income tax return will make a student independent for purposes federal student aid. The Department of Education has strict guidelines in determining whether a student has independent status. The Department’s regulations assume that a student under the age of 24 and not otherwise deemed independent will receive educational contributions from her parents. But what if the student’s parents are in bankruptcy?

Bankruptcy is not one of the conditions that automatically cause a student’s independent status. Along with turning 24, those causes are: marriage; entering a graduate or professional course of study; enlisting in the military or achieving veteran status; being an orphan, a ward of the court, or an emancipated minor; having a child or other legal dependent other than a spouse; or either becoming homeless or at risk of becoming homeless.

Even though the debtor is expressly prohibited from borrowing money during a Chapter 13 bankruptcy case, and the bankruptcy court will typically not permit the debtor to contribute to their dependent’s education during the Chapter 13 repayment period, the Department of Education does not consider filing a bankruptcy as an “adverse action.” In fact, many Chapter 13 debtors are approved for parent loans (PLUS loans) when they apply.

While the Department of Education does not have a rule or regulation that makes a student independent when his or her parents file a Chapter 13 bankruptcy case, it allows the individual school to use “professional judgment” as to whether or not a student will qualify as independent while the parents are in bankruptcy. The process is to appeal the financial aid decision and submit the court order prohibiting the debtor from incurring debt during the bankruptcy case. The school may require additional paperwork, such as the parent’s tax return, the child’s tax return, and a letter from your attorney. A successful appeal could mean additional funds including eligibility for federal grants or unsubsidized loans. Contact your school financial aid officer for more details on the appeals process.

Bankruptcy can have far-reaching effects. Bankruptcy is a powerful financial tool that can restructure your family finances. Your experienced bankruptcy attorney can explain how your bankruptcy will affect your family.



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