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.
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Last modified: January 28, 2008