The steep and steady rise of tuition for their children may drive some parents to bankruptcy and put the completed payment itself in jeopardy.
Tuition payments made by parents to their child’s private school, college or university may be subject to claw-back when the parents later file for bankruptcy. Those sizable tuition payments are becoming attractive to bankruptcy trustees who are looking to collect money for creditors of the insolvent parents. There is no consensus on this issue – some bankruptcy judges have ordered the claw-backs, while others have rejected the trustees’ attempts to recover tuition payments.
A chapter 7 bankruptcy trustee is empowered to recover payments to creditors or other persons made by the debtor prior to filing for protection. Trustees contend that, under the bankruptcy code, the payments should be “avoided” (that is, recovered for the benefit of creditors) because they were made with the intent to hinder, delay or defraud creditors or that the debtor did not receive an economic value in exchange for a payment. Trustees may also invoke fraudulent conveyance statutes under state law to make similar arguments to set aside transfers of funds or property.
In the context of tuition claw-backs, trustees have argued, and some courts have found, that post-secondary tuition payments made by parents on behalf of their children constitute avoidable transfers because the parents themselves did not receive reasonably equivalent value for the payments. Rather, the children did. Those court decisions relied, in part, on the fact that there is no legal obligation to pay for an adult child’s college education.
Courts reaching the opposite conclusion have posited that there is, nonetheless, a moral obligation or societal expectation that parents will assist with college expenses if they are able to do so. There, courts have rejected claw-backs unless the trustees could demonstrate that the tuition payments were part of some strategy to shield funds from creditors.
In response to the growing trend by trustees to pursue tuition payments, Congress has proposed legislation that would prohibit bankruptcy trustees from attempting to recover tuition money from post-secondary institutions. The bill provides for an exception to the avoidance of transactions by a trustee where the transaction was a good faith payment by a parent of post-secondary education tuition for that parent’s child. Unless and until that legislation becomes law colleges and universities will continue to be faced with claw-back actions filed by trustees.
For more information please contact Patrick Buckler at 410-583-2400 or firstname.lastname@example.org.