We the parents screwed up financially and had to file for bankruptcy
and are in a Chapter 13 repayment program. The FAFSA thinks according
to their estimator that we can afford to pay $10,000 a year (parent
contribution) but there is no way. There is no provision for us to
show that $1,500 a month goes to courts. (That's $18,000 a year.) No
one will give her a loan because she's 17 and never had a job (very
rural community) and no one will give us a loan due to
bankruptcy. What do we do? What can we do?
— K.O.
Your bankruptcy will have no direct impact on your daughter's
eligibility for federal student aid and federal student loans. But as
you have noticed, the FAFSA does not include any questions concerning
special circumstances, such as mandatory court-ordered bankruptcy
payments.
Ask the college financial aid administrator for a professional
judgment review. This is sometimes called a special circumstances
review or financial aid appeal. Some colleges will reduce your income
on the FAFSA by the amount of the mandatory court-ordered bankruptcy
payments. Others will not. It is not unusual for college financial aid
administrators to feel conflicted about such adjustments. You should
try to provide the college financial aid administrator with
information that will make him or her feel more comfortable with
making an adjustment in your favor.
The philosophical basis for need analysis is to assess a portion of
the family's discretionary income. Discretionary income is defined as
the difference between total income and non-discretionary
expenses. Court-ordered bankruptcy payments are mandatory and so from
one perspective should not be included in discretionary income. After
all, these funds are not available to pay for college bills.
However, the federal need analysis methodology does not currently
consider debt payments as offsetting income. So why should the need
analysis formula reduce income by the amount of the debt payments just
because the repayment plan is court-ordered? Allowing an adjustment
for bankruptcy payments could be construed as providing the family
with student aid money to help retire their debt. Also, even if the
monthly payments are mandatory, the original decision to file for
bankruptcy is often voluntary.
Moreover, many financial aid administrators will be reluctant to take
steps that might be seen as rewarding "bad behavior" such as a
bankruptcy filing after accumulating debt due to irresponsible
spending. On the other hand, you filed for Chapter 13 when you could
have filed for Chapter 7 to eliminate the debt entirely. A Chapter 13
filing represents an attempt to make good on your obligations. So if
the college grants your appeal, they would be rewarding good behavior,
not bad behavior. (But then again, college financial aid
administrators are aware that some families file for bankruptcy
under Chapter 13 because they are prevented from filing for Chapter 7
due to a previous Chapter 7 filing within the past six years. Also, a
high percentage of Chapter 13 filings are converted to Chapter 7 cases
or eventually dismissed because a debtor is unable or unwilling to
continue with the Chapter 13 repayment plan.)
You are more likely to get a favorable outcome if you provide the
college financial aid administrator with as much information as
possible about your bankruptcy filing, especially anything that will
cast it in a positive light. What is the nature of the debt that lead
to the Chapter 13 filing? Was it due to a failure of a family business
or family farm? Was the Chapter 13 filing forced on you by your
creditors? Did the bankruptcy filing result from medical debt or
a disability? Are there any other unusual circumstances affecting
your family's finances? Mention anything that might make the financial
aid administrator sympathetic to your situation.
Sponsored
$1,000 April Scholarship
Easy to Apply
Sponsored
Get Your Custom List of Scholarships to Help Pay for School. Sign Up Now!
Fastweb is your connection to scholarships, financial aid & more.
Join the Discussion