Can Trustees Go After Children’s College Tuition Payments?

A recent trend in bankruptcy law is for trustees, the individuals responsible for collecting money for creditors, to go after tuition payments parents made to their children’s undergraduate institutions. As the trustees see it, the funds parents sent to those institutions should have instead been used to pay off the parents’ debt. Since 2008, over 25 colleges and universities have been sued to recover tuition payments.

What is a Trustee?

A trustee is the person who is responsible for taking care of the financial affairs of a bankrupt individual. They have broad power to retrieve funds spent by the bankrupt person and give those funds to creditors.

Part of a trustee’s job involves retrieving assets that were hidden and money spent prior to bankruptcy, even if that money was spent several years before filing. If a trustee finds that the individual spent money and did not get a “reasonably equivalent value” for that expense, then they are allowed to recover it. The process of retrieving these funds is called a “claw back” based on the concept of fraudulent transfer.

What is Fraudulent Transfer?

When you file for bankruptcy, all of your property at that time becomes part of the bankruptcy estate. If you have assets or property that go above the allowed exemption amount (i.e. the maximum amount you are allowed to have to file bankruptcy), then the trustee can take that excess property to settle creditor debts. The maximum allowable amount to file bankruptcy has been believed to possibly encourage people to get rid of, or transfer, assets before filing in order to qualify for bankruptcy.

For example, if someone had an expensive car they wanted to keep, but it put their property value over the allowed exemption rate to file for bankruptcy, it is possible that an individual would sell that car to a family member for half its retail value to keep the car in the family, but not have it count for bankruptcy purposes. This is a fraudulent transfer because the family member gave away property for less than its equivalent value. In this circumstance, a trustee could “claw back” the car to repay creditors.

What’s the Argument?

It’s the same idea with college tuition payments. Just like the car, the parents did not get the “reasonably equivalent value” of their children’s education because they themselves were not the recipient of the education. While the benefit of a higher education on an individual’s future has long been established, certain courts have found the link between a child’s education and the parents’ value of that child’s education too attenuated to avoid claw back.

Though the trustee has discretionary authority to go after certain funds, he has a duty to bring lawsuits where the benefits clearly outweigh the costs. Considering that tuition rates have skyrocketed in recent years, the benefits are becoming a popular option for repayment. At minimum, pursuing tuition payments in bankruptcy is no longer dismissed because of the minimal repayment options.

What Now?

Bankruptcy courts are split on whether or not to allow this type of claw back and Florida has yet to rule on the issue. Contact the experienced Tampa bankruptcy attorneys at All Family Law Group, P.A. today to help you get back on your feet and take control of your finances. Call 813-816-2232 for a free consultation, or contact us online today.

By Lynette Silon-Laguna Google+