Chapter 7 Bankruptcy is a liquidation bankruptcy. When you file Chapter 7, a trustee is appointed to "administer" your bankruptcy estate, which means selling any non-exempt assets to pay creditors.
However, the bankruptcy trustee only has control over property of the bankruptcy estate. If it's not "property of the estate", the trustee can't sell it.
So, what happens if the debtor has money from a federal student loan in her bank account at the time she files Chapter 7 Bankruptcy? Or maybe she has been approved for the loan, but hasn't received it yet.
Is a federal student loan property of the bankruptcy estate? Can the trustee take a federal student loan and use it to pay the debtor's creditors? Can the Chapter 7 Bankruptcy trustee take your federal student loan?
Section 541(a) of the Bankruptcy Code defines property of the bankruptcy estate. Subsection (a) contains a list of property that is included in the bankruptcy estate; subsection (b) contains a list of property that is excluded.
Section (b)(3) provides:
"(b) Property of the estate does not include--
(3) any eligibility of the debtor to participate in programs authorized under the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.; 42 U.S.C. 2751 et seq.), or any accreditation status or State licensure of the debtor as an educational institution;"
The Higher Education Act of 1965 (the "Act") is a law that governs federal higher education resources and student assistance, including federal student loans. The Act provides for the following federal student loan programs:
Federal Family Education Loan Program
Federal Work Study Programs
William D. Ford Federal Direct Loan Program
Federal Perkins Loans
So if the debtor has money from one of these federal student loan programs, the trustee cannot touch it. It's not property of the bankruptcy estate, end of story.
Moreover, the Act at section 1095(d) provides:
"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, 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."
Simply stated, federal student loans and other higher education benefits provided for under the Higher Education Act of 1965 cannot be garnished or seized to pay a debtor's creditors. And, because a bankruptcy trustee stands in the position of a hypothetical creditor of the debtor, the trustee likewise is unable to garnish or seize such student loans to pay the debtor's creditors.
This blog post is not legal advice, and you should not rely on it as legal advice. If you have questions about your federal student loans and bankruptcy, contact our office and speak to an attorney today. We're always available and here to help (562) 479-0939.
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