Exemption Of Funds From Student Loan Proceeds In Bankruptcy


Are the funds that a debtor deposits in his or her bank account exempt, if those funds are exclusively the proceeds of a federal student loan?  This was the question recently examined by a Kansas bankruptcy court.  The case was In Re Decena, and it was decided on March 30, 2015 (Case no. 14-10668,  Dist. Of Kansas).

In the Decena case, the debtor filed a Chapter 7 bankruptcy and listed on the schedules a bank account that held funds that were exclusively loan proceeds from federally-guaranteed student loans.  There was about $4500 in the account on the day of the filing of the case.

The Debtor claimed that the funds in the bank account were exempt under 20 U.S.C. Section 1095a(d).  There was some complex procedural history with the amendment; the schedules had been amended later in the case.  The Trustee objected to the exemption, and to the fact that the schedules had been amended to claim the exemption.  The exemption claimed was a “federal exemption” as distinguished from the exemptions created by Kansas state law.  The Trustee had also filed a “motion for turnover” seeking to have the Debtor turn the funds over to the Trustee.

Judge Somers, who issued the ruling, first held that the Debtor had an unqualified right to amend the bankruptcy schedules “at any time” before the closing of the case.  This is specifically permitted under the Federal Rules of Bankruptcy Procedure (Rule 1009).  An amendment would only be a problem unless it was done in bad faith, or for the purpose of advancing fraud.

From the moment of the filing of the case, the Trustee had known of the Debtor’s intention of wanting to exempt the funds; the only thing that had changed during the amendment process was the statutory authority used for the exemption.  This fact created no problem or hardship for the Trustee.  Any “prejudice” to the Trustee was minimal and incidental, and did not justify denying the Debtor’s amended Schedule C.

After making this determination, the Court moved on to the heart of the issue.  Because the Debtor had lived in Kansas for more than two years before filing the case, the Debtor could make use of the exemption in question pursuant to In Re Likins, 505 B.R. 319 (D. Kan. 2014).  The federal statute in question held that student loan proceeds could not be attached or garnished.  The Trustee’s contention that the schedules were amended in “bad faith” to list the exemption was without merit, ruled the Court.

Key to the Court’s finding was the fact that the parties had stipulated that all of the monies contained in the account were directly derived from federally-guaranteed student loans.  In other words, there was no co-mingling of funds from other sources.  Presumably, the outcome of this matter would have been different had the Debtor not been so scrupulous about segregating his student loan funds in his bank account.  There is also the issue of being able to make use of the federal exemption under 20 U.S.C. Section 1095a(d). Had the Debtor not lived in Kansas for two years before the filing of his case, it appears he would not have been able to make use of the exemption.  But even if this had been the case, problems likely could have been avoided by the Debtor’s spending of the student loan funds for their required purposes before he filed his case.

Read More:  Student Loan Debts In Bankruptcy In Kansas City