September 24, 2017

Will Bankruptcy Prevent Me from Getting a Student Loan?

cartoon of a graduate reviewing the bill from his parentsClients often ask me whether filing a bankruptcy case will affect their eligibility for student loans.

Generally, these are parents who plan to seek PLUS loans for their kids’ college educations, but sometimes it is the client who plans to go back to school and needs financial assistance in order to do so.

The bankruptcy code is specific

The Bankruptcy Code contains a specific provision forbidding those making student loans from discriminating against student loan borrowers because of their bankruptcy.  11 U.S.C. §525 is the anti-discrimination provision of the Code, and subsection (c) provides as follows:

 (1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(2) In this section, “student loan program” means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.

11 U.S.C. §525(c) was added to the Bankruptcy Code in 1994.  Importantly, it applies to both governmental and private lenders (banks) and prevents both from student loan discrimination on the basis of bankruptcy.

From my extensive bankruptcy experience, here’s what I know

There is not much case law explaining or shedding light on how this provision applies to real people and real facts.  However, based on my experience, I can tell my bankruptcy clients that:

  • if no one is willing to make student loans to those with a bankruptcy on their credit report, then the pool of potential borrowers would be greatly reduced, and this hasn’t happened yet, to our knowledge.
  • the financial problems that necessitate a bankruptcy filing may very well hinder your ability to obtain student loans, so you may be damned either way.
  • bankruptcy provides the honest debtor with a fresh start, discharging debts and freeing up income that can now be demonstrated as available to repay student loans.
  • a parent’s bankruptcy does not affect a dependent’s creditworthiness, or the dependent’s eligibility for student loans.
  • while in a Chapter 13 bankruptcy case, a debtor may not incur additional debt without court approval.

Bottom line, if you’re considering bankruptcy and have any concerns or questions the treatment of your student loans, consult a qualified bankruptcy attorney.