College Tuition Payments and Personal Bankruptcy

Are you currently paying your child’s college tuition? If you’re thinking about filing for personal bankruptcy, you should be aware that bankruptcy trustees have begun recovering tuition payments from colleges and universities on behalf of the creditors of insolvent parents. Indeed, according to a recent article in the Wall Street Journal, “the trustees argue the funds should be recovered to pay off the parents’ debt instead” of the kids’ tuition, and “in many cases, they’re succeeding.”
Universities Return Tuition Payments
Back in February, a bankruptcy trustee sued the University of Bridgeport in an attempt to recover money for creditors. Previously, the parents of Orlando M. Morales, a student at the University of Bridgeport, had paid tuition money for their child. They later filed for Chapter 7 bankruptcy. After returning $4,000 to the trustee, the university made clear that it “reserved the right to go after Mr. Morales himself.”
Other colleges and universities have had similar experiences. For instance, New York University was hit with a lawsuit back in October over more than $27,000 in tuition payments from a couple in Minnesota who had since declared bankruptcy. A month prior, Pace University settled a similar lawsuit and agreed to repay nearly $24,000. According to John Beckman, a spokesperson for NYU, “attempts to claw back tuition money are deeply unfair to that institution which has provided real value to the family.”
Attempting to recoup money for creditors by turning to previously paid tuition money is a new thing. To be sure, “chapter 7 trustees and consumer bankruptcy lawyers say the trend was nonexistent several years ago.” However, many experts expect that the trend will only rise in the future and that the number of tuition-related lawsuits will continue to increase. Since 2008, at least 25 colleges and universities across the country “have been asked to return money” in the aftermath of a personal bankruptcy. Of those institutions, more than 12 reportedly complied.
Broad Powers of Bankruptcy Trustees
When you file for Chapter 7 bankruptcy, it’s important to understand that “trustees have broad powers to claw back funds for creditors.” To be sure, trustees can look closely at “ill-timed transfers of filers’ homes, cars, cash, or other assets that may have gone to family members or otherwise stashed away.” While many of us understand that trustees can look to assets that appear to have been hidden or used with an eye toward filing for Chapter 7, most of us wouldn’t jump to include money that was legitimately spent years back. In particular, legitimate college tuition payments for kids probably don’t strike most of us as the types of funds that trustees would go after.
However, the U.S. bankruptcy code allows trustees to “sue to take back money that a bankruptcy person spent several years before filing for protection if a trustee finds that the person didn’t get reasonably equivalent value for that expense.” And since the filers usually aren’t the ones who got something from the tuition—their children received the value of the education—the trustees can go after tuition payments from years before the Chapter 7 filing.
If you have questions or concerns about filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy in Illinois, you should speak with an experienced Oak Park bankruptcy attorney. Contact the Emerson Law Firm today to discuss your situation with a dedicated consumer advocate.
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