What happens to student loan disbursements (in TN)

[Clabbergirl]

I'm a grad student and will receive several grand next semester, mid-Jan, left over from my student loans. In the past, these leftovers have kept me afloat. I will receive it in Jan, and again in May before it stops. What happens to this money in a BK, both 7 and 13? Is it better to file after receiving the funds so I can pay some of my creditors or negotiate for charge-offs, orfile before getting the education money?

I'm in TN which doesn't allow Fed exemptions, and I found nothing about education benefits (that I can understand). Also, I have some stocks worth today's value at approx. $850. I've been considering selling to pay for upcoming car repairs and maybe a little Christmas. Should I cash those out now, or sacrifice them to the BK? Means test said I qualify for Chp. 7, not sure if I want to. Shared ownership of home and car with ex and no equity in either.

[chrisdfw]

I believe then you use state exemptions you also get to use federal non-bankruptcy exemptions, which I believe includes
education benefits. You will likely have to be careful to keep them separate and may even have to fight a trustee if you
still have them around after a few months.

I might just file before I got the money. Do NOT use the money to pay creditors if you will be filing bankruptcy, maybe
spend it on your attorney.

[Exployer1234]

I am in TN. I received money left over from my student loans. I filed Chapter 7 in April of this year. I received my loan disbursement check back in January. You are allowed to have 4000 in assets. This amount includes the cash you have, so if you receive 2000 from the loan disbursement check and have 2000 in various other assets you will be fine. Any more than that the trustee will take. The loan money you receive back is not exempted from being taking when you file BK.

All the trustee asked me was what i did with the money that I got back from school. I had just a little over 4000 in assets when I filed. I told him I used the money to pay my lawyer, got my car running that was broken down, and used some of the money for school books and living expenses. I said I had to list what I had at the current time of filing. I said that number is now lower since I had to pay the lawyer. He was fine with this.

I would not pay any creditors if you plan on filing BK. I would use the money to stock up on living expense. Just don't buy luxury items and pay anyone more than 500 dollars for any items. The trustee will normally ask what you have done with the money you received. I would just be honest and tell them exactly what you have done with everything.

[Clabbergirl]

Thank you for replying. 'Federal non-bankruptcy exemptions' set me googling, and I've found several things that explain what you are saying here. If I can file before I get the next stipend, I will. It's coming up with the filing fee +$850 lawyer fees at this time of year that's making it difficult.

I've included a link that explains this also.

[Clabbergirl]

Employer1234, what you've described is my worst fear. It seems like it should be illegal. What if the student loans are federal ones? You'd essentially be borrowing federal education money at a low interest rate to pay past unsecured debts. And then saddling yourself with a loan you cannot ever discharge. My own research has turned up information contrary to what you've said here, but of course all I've found to argue it are attorney websites.

I would cancel the current loan I have if I could get another one, but that is not possible.

[Clabbergirl]

Ok, for those who are better at interpreting the law than I, here is the code I found regarding student loans and exemptions:

(d) No attachment of student assistance
Except as authorized in this section, notwithstanding any other provision of Federal or State law, no grant, loan, or work assistance awarded under this subchapter and part C of subchapter I of chapter 34 of title 42, or property traceable to such assistance, shall be subject to garnishment or attachment in order to satisfy any debt owed by the student awarded such assistance, other than a debt owed to the Secretary and arising under this subchapter and part C of subchapter I of chapter 34 of title 42.

[Exployer1234]

Student grants normally go to the school and student loans go to any unpaid tuition after the grants are used. what is left over and sent to you from the loan is considered income. I know that sucks, but it is not exempt from being taken in a BK. The only way to ensure that it is not taken from you is to have 4000 or less in assets and cash. Anything over that will be considered part of the BK court and can be distributed with your creditors.

Now if you own a home you do have a homestead exemption and may be able to tie your loans into this exemption.

I know that the money is supposed to be used for paying bills, but in a BK it does not work that way. All I can say is contact a lawyer and discuss what you have. I can pull my BK papers up for you and tell you exactly what is on them.

[Exployer1234]

I have pulled up my BK paperwork. I will say that I did have a garnishment that was starting to go through right before i filed BK. They were garnishing what I had in the bank and considered part of my student loan money as income. It was not exempt from being garnished. So to answer your first question on whether they can garnish the money: the answer is yes. Once you deposit the money in the bank it is fair game in TN.

Now in the Chapter 7 cases on your schedule B you will have to list what is in your checking account and how much cash is on hand. You will also need to list the amount of all other assets.

On your Statistical Summary of Certain Liabilities and Related Data you will list what student loan debts you have presently.

So no where in the paperwork does it describe why you have the student loan money in your possession. In the BK courts this does not matter. Since the loans are counted as income.

This is the exact summary of exemptions that can be used in a BK case

http://www.bankruptcyinformation.com/tn_exemp.htm

[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.

[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.

[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.

[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]

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]

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]

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.