Families Fight to Keep College Tuition from Bankruptcy Trustees

July 9, 2015

As reported by the Wall Street Journal, there is a growing trend among bankruptcy trustees to recover college tuition paid by bankruptcy debtors on behalf of their children. Under the U.S. Bankruptcy Code, a trustee can sue to take back money that a bankrupt person spent several years before filing for protection if the trustee finds that the person didn’t get “reasonably equivalent value” for that expense. Since the parent did not receive “value” from the college education (the child did), the payment may be recoverable and distributed fairly between all of the debtor’s creditors.

This provision of the law is not new. Trustees routinely sue to recover money or property “gifted” to another person on the eve of a bankruptcy filing. These transfers are often fraudulent, but are sometimes innocent. The law does not make a distinction when it comes to these types of gifts.
Traditionally, bankruptcy trustees have not sought recovery of college tuition payments. This is likely because of fairness concerns and that the amount of money at issue was historically low. However, the trend has increased as college tuition rates have skyrocketed. In 1990 the annual cost at a state college was around $5,000. Today it is over $15,000 per year.
Last February, the University of Bridgeport returned $4,000 in college tuition payments after being sued by the bankruptcy trustee after a student’s parents filed for Chapter 7 bankruptcy. The school said in a court filing it reserved the right to go after the student to recover this money.
New York University was sued in October to turn over $27,152 for a Minnesota couple’s debts. Pace University quickly settled a lawsuit in September, agreeing to pay $23,290.80.
If you are contemplating bankruptcy and have paid college tuition in the recent past, speak with an experienced bankruptcy attorney about the possibility of a trustee lawsuit. This trend is not occurring in every jurisdiction or with every trustee. Your attorney can advise you as to the risks in your particular case.
If you are considering filing for bankruptcy please call the experienced attorneys at Fears Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
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