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Could your bankruptcy actually help your kids get financial aid?

If you’ve been hit hard by the Great Recession, you probably have more bills than you know what to do with. A job loss, for example, not only means less income but a cascade of negative financial events. When people are struggling with unmanageable debt, they often try to throw every penny at debt and leave off saving for less urgent needs like retirement and college funds for the kids.

If you’re stuck in debt and you have a child about to graduate from high school, what can you do?

You really should sit down with a bankruptcy lawyer and discuss your options. After all, if you’re in enough debt that you’re seriously considering filing for bankruptcy, chances are your credit is already poor enough that the impact of filing for bankruptcy would be comparatively small -- or it might even improve your situation.

For example, when people haven’t saved up but want to contribute to a child’s college education, the typical method is to take out a federal loan through the PLUS loan program. If you don’t qualify for a PLUS loan, you could try for a private loan -- but you’d need good credit.

It’s true that filing for bankruptcy makes you ineligible to take out a PLUS loan for five years. That’s frustrating, but it might actually help make your child’s education more affordable. Why? Because students whose parents can’t get PLUS loans are often eligible for more federal Stafford loans than they would be otherwise.

After scholarships and grants, Stafford loans are typically the student’s best option because their terms are better than most private loans. Unfortunately, few students can pay for their entire education through Staffords because of caps on the total amount their eligible to borrow from the program each year. Your ineligibility for a PLUS loan boosts your child's Stafford eligibility cap.

Bankruptcy may or may not be the best option for you. This particular example, however, shows that bankruptcy can have a variety of different impacts, both negative and positive, on your overall financial situation.

Source: U.S. News & World Report, "How Bankruptcy Affects College, Grad School Financing," Kelsey Sheehy, Nov. 13, 2013

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