A growing number of bankruptcy trustees collecting money for creditors in personal bankruptcy lawsuits are reclaiming college tuition fees years after the money was paid.
Court-appointed trustees generally have the power to recover money from “improper” transfers and payments that were made up to six years before a person filed for bankruptcy. While not all are sucessful, it’s clearly worth the effort since trustees get paid a percentage of whatever they recover as well as a standard fee. A recent Wall Street Journal investigation revealed that in 2013 alone trustees collected more than $3 billion in Chapter 7 bankruptcy cases. Of course they also have a legal duty to recover as much as possible for creditors.
This has led to calls for new laws that will prevent bankruptcy trustees from attempting to claw back unversity and college tuition fees from the institutions and from former college students. And already a bill has been proposed that, if passed by Congress, is hoped will do just this.
The Proposed Protecting All College Tuition (PACT) Act
Congressman Chris Collins Republican representative for the 27th district of New York, has introduced the Protecting All College Tuition (PACT) Act which aims to amend the Bankruptcy Code Section 548. Its stated purpose is to stop trustees from “clawing back tuition money from universities,” although there is a school of opinion that believes trustees will still be able to sue under various individual state’s “fraudulent transfer” statutes to recover money previously paid out in the form of fees.
If the PACT Act is not adopted, or if it proves to be inadequate in terms of stopping bankruptcy trustees from targeting universities, institutions might start demanding that students or approved third party funds or trusts take legal responsibility for tuition payments. Alternatively they might demand that parents resonsible for fees provide financial statements when the make payments. This would aim to verify that the payee was solvent when the payment was made.
The argument in favor of targeting colleges, and in some cases even students themselves, is that parents are not legally obliged to pay for college tuition for “children” over the age of 18 years, unless there is a specific family court order that forces them to do so (for instance in the case of a divorce settlement.) Recognizing this, many universities and colleges invoice students for tuition, even if payments come from their parents. Legally this is seen as “a gift,” and bankruptcy trustees simply have to prove that the payment was a “fraudulent transfer” in terms of the Bankruptcy Code and state law.
If the trustee can prove that college tuition fees were paid within four to six years of the parent filing for bankruptcy, and that the person was either already insolvent or became insolvent as a consequence of the payment, the trustee has a case. However, he or she also needs to prove that the now bankrupt person less than “reasonably equivalent value” in exchange for the money paid. Several courts, though not all, have ruled that parents haven’t received this “reasonably equivalent value.”
Court Cases Involving Bankruptcy Trustees
Several cases have been reported, including one that involves the University of Maryland that has been sued for return of $61,595.33 paid by a couple in Connecticut for their son’s fees from 2010.
Marquette University was forced to pay across $21,500 in 2011 after a bankruptcy court judge ruled that the benefit to the parents wasn’t “concrete” or “quantifiable.”
Two cases in Pennsylvania went the other way, with trustees being prevented from recovering college tuition fees.
There have also been reports of cases where students have been sued, although many (if not most) would not be in a position to refund the money. In 2006 a graduate of Boston College was sued successfully and he ended up paying out $10,000 while the college refunded $3,230 to the trustee.
Then there are further reports of many colleges acceding to bankruptcy trustee demands and paying over fees to prevent legal action, as well as accounts of unversities and colleges simply ignoring demands.
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