If a student receives a direct deposit refund from a school due to a federal Stafford Loan, is the money protected in a Chapter 7?

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If a student receives a direct deposit refund from a school due to a federal Stafford Loan, is the money protected in a Chapter 7?

The full time college student is unemployed and doesn’t have any other assets. Uses the money for books, food, transportation, and rent. Also if part of the money has already been used, would things be complicated even further?

Asked on August 18, 2010 under Bankruptcy Law, Indiana

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Student loan debts are almost impossible to discharge, or eliminate, in bankruptcy, meaning that it's almost impossible to for the STUDENT to get out from under his or her obligations to the LENDER. However, money received by the student from a loan or from a school is not in any protected (remember: the protection relating to student loans for the lender, not the student). Therefore, whatever money the student has will be one of his or her assets that would be subject to being liquidated and distributed for the benefit of creditors in a Chapter 7 filing. Furthermore, as noted above, if the money the student received is a student loan (i.e. it has to be repaid; it's not a refund of an overpayment or something similar which is now the student's free and and clear), he or she would still have to repay it--the loan will not be discharged except in exceptional circumstances. 

If the student's primary debt is student loans, then bankruptcy is likely not a good option. The student should consult with a bankruptcy attorney to be sure, but student loans are one of a small number of debt types that bankruptcy does not offer much relief from.


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