Bankruptcy Trustees Are Asking (and Getting) Colleges to Return Parents’ Money

[switch625]

May 6, 2015 by Andy Thomason Chronicle of Higher Education

Bankruptcy Trustees Are Asking (and Getting) Colleges to Return Parents’ Money

The Wall Street Journal is out with an article taking stock of what appears to be a new trend: bankruptcy trustees who are seeking to take back insolvent parents’ tuition payments. The newspaper cites several examples of colleges’ agreeing to return payments, ranging from $4,000 to over $23,000. At least 25 colleges have been asked by bankruptcy lawyers to return money since 2008, the article states, and bankruptcy lawyers say such collection was unheard of several years ago.

• 
• Source: WSJ

Soaring college tuition payments are drawing attention from unexpected quarters: bankruptcy courts. In a growing number of personal bankruptcy cases, trustees responsible for collecting money for creditors have moved to claw back tuition payments that insolvent parents made for their children. The trustees argue the funds should be recovered to pay off the parents’ debts instead.

http://chronicle.com/blogs/ticker/jp...-parents-money

[bcohen]

I read the article, which is very short and thin on details. What I don't understand is that tuition payments by parents are not preferential payments of debt--they are a contemporaneous exchange of money for services on behalf of their children. Under what legal theory can the trustee "claw back" these funds?

[LadyInTheRed]

I don't subscribe to the Wall Street Journal, so couldn't read that article. But, I found another article referring to the WSJ article that gives more info than the Chronicle article does.

Based on the description in the article that don't actually cite the law, the transfers are being avoided under 11 U.S. Code § 548(a)(1): Here's the text with the relevant portions bolded. It's much easier to follow if you ignore the non-bolded portions.

(a) (1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily— (A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(B) (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

The trustees argue that since the tuition is for the benefit of the debtor's child and not for the benefit of the debtor, then it is a voidable transfer. The article mentioned the outcome of 3 specific cases. In one, the school settled instead of fighting the AP filed by the trustee. In one, the court ruled for the trustee and in the other, the court ruled for the school.

[despritfreya]

Exactly what Lady says. Been there - done that. Nothing new IMHO.

Schools typically settle with the trustees since that is cheaper than litigating. Unfortunately such can fall back on the student who is still in school so Trustee's will try to settle with the debtor before contacting the school. In the two cases I can think of off the top of my head, my clients didn't care since the children had already graduated.

Des.

[LadyInTheRed]

This is from another thread joshuagraham posted in a different forum. I am posting it here to keep the conversation in one place.

Title: Paying children's college tuition is considered a constructive fraudulent transfer?


Evidently the trustee can go after the college! What?

http://finance.yahoo.com/video/bankr...223939716.html

I love how the interviewer interrupts the attorney to get him to dumb it down when he was probably about to say pretty much what she said if she would just let him finish his thought.

[switch625]

So if you are in a 13 and paid your kids tuition, thanks to the Trustee's interpretation of the BK Code you get to double dip? Pay the college and the trustee with the same $$? I'm curious if a college ever went after a debtor post-discharge for the clawed back amount. Can they do that?

[justbroke]

A Chapter 13 would not matter. In a Chapter 13, the Trustee is not liquidating the Estate. In a Chapter 13, they perform a best interests of creditors test which is a liquidation test of sorts (comparable to what "would" have happened in a Chapter 7). Then you just need to minimally pay that amount to the unsecured creditors in a Chapter 13. This specific clawback is rare for Chapter 13s and I can't personally find one case. Especially since Chapter 13 Trustees don't liquidate anything.

Also, this is not big news and the article is poorly written. It did not explain the "preference" period and some people are probably thinking that they can recover your child's tuition from 10-20 years ago! It may be a little disingenuous at that.

[calforexto]

@bcohen
I will recommend [link removed by moderator] for get detailed information about foreign money exchange.