If you're enrolled in college and thinking about filing for bankruptcy, you may be worried about your financial aid and if it will be at risk. Only individual debtors who file for chapter 7 bankruptcy have their assets seized. However, any financial aid you received from the federal government, including a Pell grant, is exempt from seizure.
Purpose of Pell Grant
Pell grants are typically awarded to undergraduate students who have not yet earned their bachelor's or professional degree. The funds are provided by the federal government and do not need to be repaid. The amount a student is eligible to receive is based on financial need, education costs, part- or full-time enrollment status, and whether school attendance is for a full academic year or less. The funds are distributed to the student's school and the school first applies the funds to tuition, fees and room and board, if applicable. Any balance left over is typically forwarded to the student.
Pell Grants Exempt from Seizure
After you file for bankruptcy, the bankruptcy trustee seizes your assets to repay as many of your creditors as possible. However, federal benefits are exempt from seizure. This means Pell grants along with federal direct loans, work-study funds, Perkins loans and any other financial aid provided by the federal government are exempt, meaning the bankruptcy trustee can't touch these assets. This is also true if you deposited Pell grant funds into a personal checking or savings account. Neither the bankruptcy trustee nor any other creditor can garnish these funds from your account because federal student assistance is also protected from garnishment.
Based on the West Coast, Mary Jane Freeman has been writing professionally since 1994, specializing in the topics of business and law. Freeman's work has appeared in a variety of publications, including LegalZoom, Essence, Reuters and Chicago Sun-Times. Freeman holds a Master of Science in public policy and management and Juris Doctor. Freeman is self-employed and works as a policy analyst and legal consultant.