A Chapter 7 and a Student Loan

A question arose recently on a bankruptcy forum website about a wife’s student loan. Seems an unemployed husband was having trouble with making bills, so he borrowed against his paid-off car with a title loan. The interest soon became unbearable, and when the wife went into graduate school on a student loan, the husband paid off the high- interest car loan figuring he could pay off the lower interest in time. With only a temporary job, the husband now wants to know how paying off the car with government student loan funds might now affect a Chapter 7 bankruptcy filing.

Federal and Student Loan Involve Two Different Laws

In order to legally answer the man’s concerns, he must first realize he is dealing with two different aspects of the law. FederalĀ  loans and bankruptcy both have their own nuances when it comes to law. If the man feels he has broken any law concerning the misuse of federal student loan money, he needs to visit with a lawyer that specializes in that area of law.

Although both issues are dealing with federal law, a crime committed in the misuse of funds provided from a federally funded program is normally not dealt with in a bankruptcy court. A bankruptcy court judge or trustee that gets wind of such matters might turn the issue over to the proper authorities, but other than when fraud is involved as clear intent, the bankruptcy court most likely would not get involved. If there is clear intent to commit fraud against the bankruptcy court, a bankruptcy judge would likely toss the bankruptcy out of court with prejudice and possibly see to it the offender is prosecuted. Any kind of fraud, including bankruptcy fraud, is a serious federal offense that can land the offender in jail and having to pay hefty fines if successfully prosecuted.

Possible Perceptions

In this particular case, it can be very possible the husband did no wrong at all. There is a lot of leeway in the use of federal student loan funds to be used as living expenses. If the man can convince a judge he used the money to purchase an asset as a better way to make his expenses stretch and ends meet, he probably did not do anything particularly wrong. If he has doubts, he still might want to visit a lawyer for peace of mind.

The only negative perception would be if some authority of the court got the idea the man took advantage of the program to buy an asset that has nothing to do with living expenses. Buying a Ferrari with the federal student loan money for pleasure trips might be an example of misusing the money. The man stated he paid off the title loan on a 2004 Infiniti.

Most likely, the subject of the expense won’t even be raised in a Chapter 7 bankruptcy filing unless the trustee raises the question because of the six month look-back on the man’s expenditures. Buying a car is usually a normal expense, so the expenditure might never raise a question. The question for look-backs in a Chapter 7 bankruptcy is for preferential payments. This may or may not cause a problem. If the trustee asks, the best thing for the man to do is be honest about the situation. The trustee could go back after the funds if his perception was that the expenditure was preferential.

If you are in doubt about expenditures before filing a Chapter 7 bankruptcy, contact us here at www.betterbankruptcy.com and we will help you find a lawyer in your area to help answer your questions about bankruptcy.

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