First off, be honest, or you really will be hosed for good.

As far as any airline or the government is concerned, if you attended training, you were employed (pay has nothing to do with it). You will almost certainly have a failure record on the PRIA paperwork.

Personally, I would be more concerned with a groundschool failure than with a sim failure...bad things can happen to good people in sim, not often, but sometimes. There are many variables beyond your control (instructor, partner, schedule, etc), plus if you go from CFI to jet it's a steep curve. Ground school is usually cut-and-dried though. A lot of work, but you usually know the answers to the tests in advance, you just have to learn them. I would suspect that a GS failure was due to lack of effort or concentration.

You need to accept responsibility, analyze the situation and figure out WHY you failed. Then be prepared to explain it, and also explain what you have or will do differently. If you had serious outside distractions (family, illness, relationship) that might be a good mitigating factor but hopefully you have resolved whatever the issue was.

If it was simply lack of effort, you can probably say the failure was a major wakeup call/attitude adjustment and they'll believe you. I'd probably hire you under those circumstances...compared to some CFI's you already know what to expect. Good Luck.