In the past college tuition was a non-issue in bankruptcy cases because financially it did not amount to much. However, in recent years, college tuition, especially at private universities, can cost up to $50,000 a year. On average, the annual college tuition is over $30,000. Bankruptcy trustees therefore have begun focusing on tuition paid by financially struggling parents as a potential clawback opportunity. In a growing number of personal bankruptcy cases, trustees authorized to collect money for creditors have moved to clawback tuition payments that insolvent parents made for their children. The trustees argue that these tuition funds should be recovered to pay off the parents’ debts.
What is a Clawback in Bankruptcy?
Under the U.S. Bankruptcy Code, a trustee can void preferential or fraudulent transfers of property that were made prior to the filing for bankruptcy. Simply put, if you paid back preferred creditors or transferred property out of your name prior to a bankruptcy filing, the trustee may be able undo the transaction and recover the property for the benefit of unsecured creditors. This is known as the bankruptcy “clawback” provision.
Transfers that are subject to the clawback provision include preferential transfers/payments to certain creditors, payments/transfers over $600 in aggregate to one creditor made within 90 days preceding bankruptcy, payments/transfers to insiders, or fraudulent transfers.
Clawback Provision and College Tuition
As a result bankruptcy trustees have begun suing universities and even students to take back the tuition paid. These lawsuits present an unexpected concern that bankruptcy can create for families. Tuition recovery lawsuits are a new occurrence because in the past tuition payments were too small that trustees did not waste their time pursuing them. With tuition costs on the rise and parents assisting their children’s education, bankruptcy experts predict that these lawsuits will become more prevalent.
The lawsuits have surfaced due to court-appointed trustees who have a duty to retrieve as much money as possible to repay creditors. In the majority of states, trustees have the authority to look for improper payments and transfers made up to 6 years prior to the bankruptcy filings. According to the U.S. Bankruptcy Code, trustees can sue to take back money that a bankrupt person spent several years before filing for protection if a trustee finds that the person didn’t get “reasonably equivalent value” for that expense. Unfortunately the law doesn’t define “reasonably equivalent value” and so this interpretation has been left open to the courts.
Consult a Bankruptcy Attorney
If you are facing bankruptcy and have made payments or transfers prior to a bankruptcy filing, you should speak with an experienced bankruptcy attorney to discuss how a bankruptcy trustee may handle various transfers made. Certain exemptions can protect your property during bankruptcy proceedings.
Attorney Christopher L. Arrington is a bankruptcy attorney in Danville and surrounding counties. He can speak with you about how to protect your property during bankruptcy and how certain payments are treated under the clawback provisions. Attorney Arrington works with clients to learn about their situation and explain the options that may be available in light of their circumstances and debt situation. Contact Attorney Arrington today to discuss your situation today.