Can the trustee take your student loans?
Updated: Jan 10
Overview of Property of the Estate and Exemptions
All Chapter 7 cases come with a risk that you may lose property. In fact, when a case is filed, all of your property (and community property) is transferred to become property of "the bankruptcy estate". However, through exemptions, we are able to protect your property so that the chapter 7 trustee cannot force sale or turnover. Additionally, some of your property may be protected by virtue of the fact that it is secured by a debt and you do not have any equity in such property.
Exemptions are also relevant in a Chapter 13, however you do not face the risk of losing the property, but the exemptions can determine of how much you are paying into a Chapter 13 plan.
For individuals in California, you may use 3 sets of exemptions. First is the California Homestead Exemptions. This gives you an exemption for home equity along with a whole series of exemptions for your other property, such as cars, household goods, some wages, etc. The second set is the California Wildcard Exemptions. This set does not include a homestead exemption, but instead allows you to claim up to approximately $30,000 of exemptions in other miscellaneous pieces of property that are not covered by the other specific exemptions, such as tax refunds, cash, bank accounts, etc. The third set, which are the Federal bankruptcy exemptions listed in the Bankruptcy Code, but these are not available to those filing in California.
Lastly, there is a wide variety of federal non-bankruptcy laws that provide for certain protections against creditors. These protections can be brought into bankruptcy and used in addition to whichever set of other exemptions you elect to use. This includes the federal student loan exemption.
The Student Loan Exemption
This exemptions is provided for by the US Education Code pursuant to 20 U.S.C. §1095a(d). The text of the exemption states as follows:
"(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, 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."
This exemption is not capped, which means that all student loan funds that you are in possession of and/or have an ownership interest in can be claimed as exempt. However, the big issue that can come up with this exemption is whether these funds are "traceable".
With proper bankruptcy planning, we can ensure that these funds are eligible for the exemption and not defeated by a trustee arguing that the funds are not traceable, and therefore that the trustee can seek turnover of accounts in which the funds were deposited.