What happens to student loan disbursements (in TN)

[Clabbergirl]

Ok filed Chapter 7 this morning. Met with a 2nd attorney who was much more thorough than the previous. He said the same thing though - sure you might have a case but it's iffy and you'd be better off spending the money for things you need and can spend on than getting into a battle with a Trustee.

By the time I met with this 2nd attorney, much of the money has been spent on car repairs and other much-needed things that it isn't going to put me over the exemption limit.

[Clabbergirl]

An update - nearly back at square one

Talked to the lawyer about the student loan leftovers I received in Jan. The amount was deposited into a separate bank account and most of it is still there. Lawyer said all is good for a Chp 7 except for the cash - it will go to the trustee...

Thanks to the wonderful people on this forum, I trotted out my info on Title 20 (Federal non-bk exemptions) v. Title 11 (bk exemptions) v. TN code. The legal secretary of 20 years had never heard of this but passed it on to the lawyer. He researched, then called some of his colleagues - none had been in this situation. The problem is a standoff...

Title 11 of the US Code (known as Federal BK code) states anything over X amount ($10k in TN) will go to the trustee. However, Title 20 USC section 1095a(d) of the US code says money from education loans cannot be taken to settle an individual's debts. Although TN code states it will ignore exemptions listed in the BK code (and therefore sets its own), Title 20 isn't in the BK code...so it should be unaffected.

The problem may be in finding a lawyer who will take my case. What I see and even what the lawyer sees may not be what the trustee sees when interpreting the law. If I file with the money in my account, the trustee is going to try to take it. I can fight this, but it may sit in limbo for a year before even being heard by a judge. In the meantime, I may have that money frozen while waiting, and will have to hire a litigation lawyer (the BK lawyer I was using doesn't do litigation).

My lawyer referred me to another attorney who is known in the district as the granddaddy of BK attorneys, a guy who's practiced BK law in TN longer than any other attorney. I've called and made an appt for consultation, but it is scheduled 3 days before my house is auctioned off. I'm not keeping the house anyway, so I don't suppose this is a big deal. But the legal aide scared me in that she said if the house is auctioned off, I have to vacate within 2 weeks. If I file before it's auctioned, I will buy a little time while it's held up in the BK process. This is contrary to what I have read her and heard personally from others.

So...it would seem that there is truth to this whole idea that a trustee isn't supposed to take student loan stipends, based on Federal law...the same law that says anything over an exemption limit belongs to the trustee. But, and it's a big one, who wants to gamble with ifs and maybes?

I'm not sure what to do at this point - back at the beginning again. My lawyer suggested spending as much as I can before I file and in a way that's allowable (huh?), but it's about $6,000, AND I will be getting a tax refund in March that's probably about $1,500 to further complicate asset matters. The armchair lawyer in me says fight it...what is right is right. But the 43 year-old, recently-single, working mother and full-time student in me isn't sure if she's got that much resistance left in her.

Suggestions, anyone?

[shaylo85]

I just wanted to provide a copy of an article I found.

Can I Lose My Student Loan Money In My Bankruptcy Case?
by Craig Andresen, Minnesota Bankruptcy Attorney · Posted in *Bankruptcy Basics

If you are considering bankruptcy and happen to have the proceeds of your recent student loan sitting in your bank account, what happens to this money? Is it subject to being taken by the trustee to pay your creditors? If so, your education plans could be derailed: you could be unable to pay tuition, or to pay for books or important living expenses.

Fortunately, however, there is a federal non-bankruptcy exemption law protecting student loan proceeds from garnishment. If you select the state, or non-bankruptcy, exemptions in your bankruptcy case, this federal exemption ought to prevent the loss of your student loan proceeds, even if you file bankruptcy while the funds are still on deposit in your bank account. This exemption also contains no dollar limit, so it shouldn’t matter how much of your student loan is still on deposit.

This exemption is known as 20 USC section 1095a(d). It says quite simply that student loans, grants or work awards made under Subchapter IV of Title 20, or Part C, Chapter 34, of Title 42, cannot be taken by creditors of the student receiving the assistance. As a non-bankruptcy federal exemption law, it can be used by anyone filing bankruptcy if they select the state, or non-bankruptcy, exemptions in their bankruptcy case.

Although some states have “opted out” of the federal bankruptcy exemptions, every state must allow use of the state and federal non-bankruptcy exemptions. This means that no matter what state you live in, you can exempt student loan proceeds from the bankruptcy trustee if you so choose.

Claiming your student loan proceeds as exempt pursuant to 20 USC section 1095a(d) could save you from the significant problems which would arise if student loan proceeds were not exempt, and you were forced to quickly spend the money before filing the bankruptcy.

[Clabbergirl]

I was tempted to file pro se, but no, going to fork over the $ for a lawyer. It is just easier that way in the long run for me. I will be filing in Jan since Dec is moving so darn fast, but I like the idea of keeping the tuition leftovers separate. I think I'll open another account and put it all in there until the dust settles.

I'll update here what I find about this when I file and get the ball rolling. Thank you all for your help and input.

[chrisdfw]

Good luck.

The only two exemptions stated on the BK papers are
26 U.S.C 530 (b)(1) or 26 U.S.C 529(b)(1)

this is listed on schedule B- personal Property
Line 11 States Interest in an education IRA or under a qualified State tuition plan. From what I gather from reading these two laws it is a tuition that you put money into for future needs.

I hope you can find a lawyer that will take your case, because after interviewing 4 lawyers in my area they refused to challenge the trustee on the matter, even though it appears to be a law.

It is not part of the bankruptcy code, it is a federal NON-bankruptcy exemption, 20 USC section 1095a(d)

As a non-bankruptcy exemption it has no dollar limit, and doesn't require that you prove what they money will go for, just that
it is student loan money.

Any competent attorney can make the trustee understand this. Unfortunately if you file pro-se, I can guarantee the trustee will
see it as cash and object. But it is a question that would be settled by a judge, who would most certainly follow the law.

[Exployer1234]

Good luck.

The only two exemptions stated on the BK papers are
26 U.S.C 530 (b)(1) or 26 U.S.C 529(b)(1)

this is listed on schedule B- personal Property
Line 11 States Interest in an education IRA or under a qualified State tuition plan. From what I gather from reading these two laws it is a tuition that you put money into for future needs.

I hope you can find a lawyer that will take your case, because after interviewing 4 lawyers in my area they refused to challenge the trustee on the matter, even though it appears to be a law.

[Clabbergirl]

If the trustee is required to follow the law, and the law states (and is interpreted as such) that student loan leftovers after tuition cannot be seized in a BK, then I will have nothing to worry about as far as that's concerned. I'm going to get my paperwork finished over the next week and settle on a lawyer who understands exactly how it works in TN. I'll post an update when I have one for future students-in-bankruptcy.

[chrisdfw]

Your latter post here makes it sound less like income and more like property - which still isn't great but better than income, imho. And really, none of it is great. That loan money is supposed to be spent on the costs of going to school, like books, supplies, a roof over your head, transportation, and food. Paying past creditors with it sounds like abuse, but here's another example of how things don't always make sense.

Let me ask this: When I file my BK, I must include the balance of all checking accounts at the time of filing. My accounts will be empty up until I get the student loan disbursement...do I have to indicate that I will be receiving it in a couple of weeks?

It is property, and your research on it being exempt is correct. But you have to be willing to fight a trustee who will want to make you prove that the money is student loan proceeds.

Your petition is a snapshot at the moment of filing, if you file chapter 7 you are allowed to borrow money at a later date, and have no reason to disclose that in my opinion.

Your research is very good, they have to allow federal non-bankruptcy exemptions... not an option... required means required. The trustee is required to follow the law. But like I said, you can expect a fight. To me it would be easier just to file before you get the money if there are no other complicating factors.

The money should very well be exempt if claimed properly and separated properly from other money. I would not mix it with anything else, probably in a separate account.

[Exployer1234]

I agree that it isn't fair. I wish I could have saved mine for it's intended purpose, but that is one price we pay for filing BK.

I don't think you will have to list it on the schedules yet if you have not received it, but here is the kicker the trustee may ask if you expect to receive any additional money over 500 in the near future. This would happen at the 341 meeting.

When you file BK it is a snap shot of what you financial standpoint has been for the last 6 months. If you are filing taxes and expect a refund the trustee could take any additional money you receive from the tax refund. I have read about cases where people filed in November and December and the trustee is taking the expected refund from them when they file.

The trustee has the best interest of the creditors, not the people filing BK. Some trustee's are more understanding and leave people with money. I am fortunate that I had a great trustee. He was glad to hear I was back in school trying to better my future. I waited until I was already in my 30's to go back.

If you file now and don't expect the money to come in within the next 30 days you may be okay. All you can do is be honest with the trustee and tell him/her your situation. Though they want to ensure you are following the law they are not going to take everything you own.

[Clabbergirl]

Your latter post here makes it sound less like income and more like property - which still isn't great but better than income, imho. And really, none of it is great. That loan money is supposed to be spent on the costs of going to school, like books, supplies, a roof over your head, transportation, and food. Paying past creditors with it sounds like abuse, but here's another example of how things don't always make sense.

Let me ask this: When I file my BK, I must include the balance of all checking accounts at the time of filing. My accounts will be empty up until I get the student loan disbursement...do I have to indicate that I will be receiving it in a couple of weeks?

[Exployer1234]

In TN your exemptions are your homestead and your wildcard. That means in the wildcard portion you can exempt 4000 dollars of assets and cash. Your homestead exemption is somewhere around 5500-7000. These are the exemptions that I believe you are making a reference to in the exemptions portion.

I am not sure how to explain on the income part, but the IRS does not look at it as income, but the BK courts do look at the amount of money you have in your checking account. That is why they call this "income", because it is in your checking account or on hand at time of filing.

My lawyer did research this matter and came up with nothing. I had to spend the money I had down to the proper allowance. I paid the lawyer, fixed things on my car, paid for some of my school expenses, and bought groceries. This way I was not hiding money from the trustee and had all the documentation of where the money went to. He was fine with were I spent the money. So there was no problem.

If your lawyer finds a way to exempt it let us know. I am sure it would help others in TN who file.

[Clabbergirl]

Employer1234, I'm not sure how to add links either. I see that my earlier attempts failed. Nonetheless, it looks like we are looking at some of the same references.

I can see both sides of the argument in this, and I will be asking my lawyer to clarify this further. I did ask one about it and he said he would have to do some research, but at first glance that money probably shouldn't be in my bank account or it would have to fall under the exemption for TN in order for me to keep it.

I am still confused about some of the info shared here. In particular:

...student loans, grants or work awards made under Subchapter IV of Title 20, or Part C, Chapter 34, of Title 42, cannot be taken by creditors of the student receiving the assistance. As a non-bankruptcy federal exemption law, it can be used by anyone filing bankruptcy if they select the state, or non-bankruptcy, exemptions in their bankruptcy case. TN is one of those states who opted out of fed exempt and I will have to use TN's state exemptions.

Although some states have “opted out” of the federal bankruptcy exemptions, every state must allow use of the state and federal non-bankruptcy exemptions. This means that no matter what state you live in, you can exempt student loan proceeds from the bankruptcy trustee if you so choose. I understand that I cannot use any federal exemptions in the state of TN, but what about federal NON-bankruptcy exemptions?

I am not a lawyer and I don't even play one on tv, but this reads pretty clear to me that student loan funds are exempt from a bankruptcy case. I can also see how the trustee won't care where $10,000 came from when he sees it in my bank account - but will he care that it's considered a federal non-bankruptcy exemption?

I am trying to decide when to file at this point - now before those funds are deposited into my bank account in mid-January, or several months after they are and I'm half way through the semester. Either way - if they are truly considered income, then I probably don't qualify for Chapter 7 because counting the amount as income would really up my yearly wages! I'm not taxed on the loan money either - if the IRS doesn't see it as income (and want a piece of it), how can a Bankruptcy court?

Appreciate all the discussion on this.

[Exployer1234]

I am assuming this is the Bankruptcy code you are referring to right?

http://www.*************************...nkruptcy-case/

This exemption is known as 20 USC section 1095a(d). It says quite simply that student loans, grants or work awards made under Subchapter IV of Title 20, or Part C, Chapter 34, of Title 42, cannot be taken by creditors of the student receiving the assistance. As a non-bankruptcy federal exemption law, it can be used by anyone filing bankruptcy if they select the state, or non-bankruptcy, exemptions in their bankruptcy case

In the state of Tn they have assumed to Opt out of this.
http://www.*************************...nkruptcy-case/

though some states have “opted out” of the federal bankruptcy exemptions, every state must allow use of the state and federal non-bankruptcy exemptions.

What this means in reference to the client filing BK is that they must follow all state exemptions. Meaning they can use the homestead and wild card exemptions. Anything over the amount listed past these exemptions can become property of the BK estate and be taken from the client.

I am not sure how to add the links to the forum.

[Exployer1234]

Look I have read and re-read my documents. Any money you receive from the loan after all the tuition is paid is considered cash on hand. Here is another thread on the same topic.

http://www.bkforum.com/showthread.php?57054-Cash-left-over-from-Student-Loans

Just because you borrow a federal backed loan, it is not like social security payments. It is not protected by the Bk courts. it is not exempt unless you have less than the wild card exemptions.

The best advice I can tell you is to talk to a lawyer. I can only tell you from my BK case and speaking with the trustee on the money I had received from my student loans. Anything over 4000 in assets were not protected unless it fell under the certain provisions such as social security, unemployment pay, and veterans pay.

[chrisdfw]

I am almost certain some bad information is being given out, unintentionally of course.

Loan proceeds are not income, that makes no sense at all. How can you make money when you borrow money that you have to pay back?
Load proceeds are not income, they just aren't. Otherwise every time you pay for something with a credit card you would have income?

They may be able to garnish it in TN, but that is TN law using state court processes. Federal law governs bankruptcy and makes it exempt. There are a lot of states that can do certain things that can't be done in Federal court. Just because through a state court suit they can take money out of your bank account, does not mean that it may not be exempt in Bankruptcy. There are many things that can be taken in state court suits that can be exempted in Bankruptcy. That is why in some cases it is urgent to file before something is siezed and sold that would otherwise be exempt in bankruptcy.

I am not a lawyer and don't want to argue law, but I deal with law all the time.

For the OP, an attorney will be your best bet, don't take any of the advice here. Check it out for yourself, but don't take anything here as the final word.