If you are considering bankruptcy, you may want to hold-off on writing that tuition check to the college or university that your child attends. It has become increasingly common for trustees administering individual bankruptcy cases to treat tuition payments paid by a parent to a college on an adult child’s behalf as a constructively fraudulent transfer.
The trustee’s logic is based on the premise that the student is receiving a consideration from the college, but the parent is receiving nothing in value in exchange. If the trustee can meet his or her burden of proof on the the remaining elements of the governing avoidance statute, there is a risk that the child’s university will be required to refund up to four year’s worth of tuition and housing payments to the trustee in order to pay the parents’ debts to creditors.
Bankruptcy courts across the country have given different treatment to the proposed “claw back” of a child’s college tuition payments. Two courts have held that tuition payments on behalf of adult children are indeed an ‘avoidable fraudulent transfer” under bankruptcy, while other courts have ruled that the parents do receive a reasonably equivalent value due to their parental obligations.
Recently, a related case played out in a Massachusetts bankruptcy court where the judge ruled in favor of the university who was being sued for more than $60,000 in a bankruptcy proceeding. In a case that may eventually inform decisions across the U.S., the bankruptcy judge accepted the university’s argument “that the payments made to the school were made in exchange for a “reasonably equivalent value”. The argument hinged on the notion that parents can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child, which in turn confers an economic benefit on the parents.
While laws regarding college tuition payments on behalf of adult children in a bankruptcy are being decided, it is important to know where your bankruptcy courts stand on the issue. If you are considering bankruptcy as a financial strategy, contact Peoria bankruptcy attorney, Charles E. Covey, for a free initial consultation. Our bankruptcy team can provide answers to your questions so that you can decide if a Chapter 7, 13, or business bankruptcy is right for you and your family.
Sources: Wall Street Journal, “Colleges Continue to Return Tuition Money in Bankruptcy Fights”, Katy Stech, April 19, 2016; Forbes, “Sacred Heart University Dodges Fraudulent Transfer Claim For Tuition Paid In Palladino”, by Jay Adkisson, August 22, 2016.