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The Bankruptcy Act of 1994 prohibits a school (or lender) from
denying a Federal Family Education Loan Program loan to an applicant
based solely on the applicant’s filing of a bankruptcy petition.
So what are the requirements for the financial aid office when
a student or parent FFELP loan applicant files—or filed—bankruptcy?
- If the student files bankruptcy before the school
certifies a Stafford loan:
- The school must certify the loan if the student is otherwise
eligible. The school may not certify the loan for an amount
that is less than the student’s eligibility, based solely
on the bankruptcy.
- Note: If the student obtained a prior loan that was discharged
due to bankruptcy, the student is not required to reaffirm the
loan to regain FFELP eligibility.
- If the student files bankruptcy before the school
certifies a Grad PLUS loan:
- The school must certify the loan if the student is otherwise
eligible. The school may not certify the loan for an amount
that is less than the student’s eligibility, based solely
on the bankruptcy.
- Note: If the student has adverse credit, the lender may deny
the loan if the denial is not based solely on the bankruptcy.
The student may obtain a creditworthy endorser if the lender
so permits.
- If the parent files bankruptcy before the school certifies
a parent PLUS loan:
- The school must certify the loan if the student and parent
are otherwise eligible. The school may not certify the loan
for an amount that is less than the student’s eligibility,
based solely on the bankruptcy.
- Note: If the parent has adverse credit, the lender may deny
the loan if the denial is not based solely on the bankruptcy.
The parent may obtain a creditworthy endorser if the lender
so permits.
- If the lender denies the loan—or if the parent secures
from the bankruptcy court a letter that states the parent is
not permitted to incur additional debt—the school may
certify additional unsubsidized Stafford loan funds for the
dependent student.
If the student or parent files bankruptcy before FFELP
funds are fully disbursed by the lender:
If the lender is required to file a claim with the guarantor:
When the borrower files a Chapter 12 or 13 bankruptcies (or converts
a Chapter 7 or 11 to 12 or 13) or the borrower files a petition
for undue hardship, most lenders will not disburse any additional
funds on the loan and may ask the school return any undelivered
loan funds. (Note that USA Funds?’ policy does not require
the lender to ask the school to return undelivered loan funds.)
The borrower is eligible to reapply for any remaining loan eligibility
based on the cancellation of all or a part of the borrower’s
loan. The school must certify a loan for the borrower’s
remaining eligibility.
If the lender is not required to file a claim with the guarantor:
When the borrower files a Chapter 7 or 11 bankruptcies (and does
not subsequently convert to a Chapter 12 or 13), some lenders
will continue to disburse the loan funds without interruption,
but some lenders will cancel any subsequent disbursements of the
loan. If the lender cancels the remainder of the loan, the borrower
will be eligible to reapply for the cancelled amount, and the
school will be required to certify the loan. Some lenders also
may require the borrower to complete a new Master Promissory Note.
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