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Can My Bankruptcy Trustee Sue My Child's College for Money I Paid Before I Filed for Bankruptcy?

Posted on in Arlington Heights Bankruptcy Lawyer
Can My Bankruptcy Trustee Sue My Child's College for Money I Paid Before I Filed for Bankruptcy?

There have been many recent news stories published about bankruptcy trustees taking legal action to recover money paid to colleges and universities to satisfy their clients' debts. This is known as a clawback. What this means is that because the bankrupt individual was not in the financial position to make a large or unusual payment before filing for bankruptcy, but did so anyway, his or her creditors have the right to seek repayment by recovering money from the recipient of the payment. Examples of colleges and universities facing clawbacks have become controversial because when a parent pays for their child's college education, they are making an investment in the child's future.

It is legal for your bankruptcy trustee to seek repayment from your child's college for money you paid in tuition, fees, and housing expenses. If you are concerned about this, speak with your bankruptcy lawyer to determine the likelihood of it happening and how to handle it.

Facing a Clawback During Your Bankruptcy

A trustee can claw back any money paid that is deemed to be a fraudulent transfer. Fraudulent transfers are purchases made that do not result in a “reasonably equivalent value” for the purchaser. Because parents have no legal obligation to pay for their children's college expenses, money paid to higher education institutions can be considered a fraudulent transfer. But many institutions and courts are challenging this definition, stating that parents do receive returns of substantial value when they pay for their children's educations because they are helping their children avoid debt and dependence on the parents later in life.

In one notable case, a university stated that it reserved the right to seek compensation for the money it paid to a bankruptcy trustee representing a former student's parents from the alumnus himself. In others, universities have fought back against trustees seeking payment.

As college costs continue to rise, the number of clawback attempts on behalf of bankrupt parents will inevitably rise unless new legislation is passed to prohibit them. In 2015, such a bill was proposed in Congress, but it has not yet been passed. Whether your case is subject to a clawback depends on the look back period for your claim, which depends on the amount of money you owe and other circumstances of your bankruptcy case. The look back period is the length of time prior to your bankruptcy that your trustee can examine to determine if any purchases may be considered fraudulent transfers.

Work with an Experienced Arlington Heights Bankruptcy Lawyer

Before you file for bankruptcy, work with an experienced bankruptcy lawyer to determine all that you can potentially face during the process. Depending on your situation, a clawback could be one of the things you face with your bankruptcy. To learn more, speak with a member of our team of experienced bankruptcy lawyers at Newland & Newland, LLP. We serve clients in the North Chicago, Fox Lake, Zion, Winthrop Harbor, Waukegan areas from out our office located in the prestigious 180 North LaSalle street building in Chicago.

(image courtesy of Scott Liddell)

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