Brian Fisher | August 29, 2014
A family sent the me this question; honestly, I hadn’t thought about it. But, it’s a very real, timely, question as the 2008/2009 financial crisis wanes and families consider boarding and private schools.
I suspect the parent that behind this question is not alone among the many who found themselves in difficult financial circumstances during the crunch and, now, wonders,
‘Will our bankruptcy filing affect our financial aid application?’
So, I caught-up with Mike Szydlowski who bridges the private school financial aid and family finance worlds as both Woodberry Forest’s financial aid director and an independent tax preparer.
BF: How should a family that's recently been through bankruptcy broach the topic when applying to school/for financial aid (FA)? What might/should a family do if they've had a recent bankruptcy filing? Be open/talk with the FA officer about it? What kind of response/consideration might a school give?
MS: I would encourage the aid applicant to mention any past, or current, bankruptcy to the school.
If the family filed a Chapter 7 bankruptcy in the past then it should be behind them and would not necessarily have an impact on their current request for aid.
However, if the family is in the process of a Chapter 7 filing, then their non-exempt liquid assets will have to be relinquished to the courts. The family may have included some of these assets when they completed the PFS (Personal Financial Statement).
If the family filed or intends to file a Chapter 13 bankruptcy this may have an impact on their ability to pay their part of tuition.
Families often forget to include school tuition in their repayment plan they submitted to the court.
BF: If a family includes assets on their PFS, but is filing/recently filed chapter 7, should they edit their PFS to reflect that the assets are about to be/have been relinquished to the bankruptcy court?
MS: Definitely, removing these assets from the financial aid calculation would lower the family's net worth and, perhaps, help them qualify for more aid.
BF: So...after fully disclosing a bankruptcy situation with the financial aid officer/school, "What kind of response/process might a family expect?"
MS: The school might ask to see the bankruptcy filing documents and the family's 'balance sheet' that is, assets vs liabilities.
If the family’s bankruptcy filing is Chapter 13, the school might also ask to see the court approved repayment schedule to better determine if the family would have enough cash flow to pay their estimated family contribution (EFC), and to see if the family is current on their repayment agreement(s) with their prior creditors?
Knowledge of the family’s situation would also need to be shared with the business office and/or Headmaster. The school’s business office may have some additional questions for the family. Additionally, the business office may well want to run a credit check on a family in this situation.
BF: Thanks, Mike.