Tags: college tuition | parents bankruptcy | trustees | creditors

Trustees Exploit Bankruptcy Loophole to Get Back Tuition Money

By    |   Wednesday, 06 May 2015 12:17 PM

As more Americans find themselves filing personal bankruptcy claims in the face of heavy student loans, trustees charged with collecting monies owed to creditors have stumbled across a novel way to recoup the funds owed — demand the academic institution return a portion of the tuition paid to them, reports The Wall Street Journal.

"In a growing number of personal bankruptcy cases, trustees responsible for collecting money for creditors have moved to claw back tuition payments that insolvent parents made for their children. The trustees argue the funds should be recovered to pay off the parents' debts instead. In many cases, they're succeeding," reports the paper.

The cases were virtually non-existent, but are increasing as more people struggle under the weight of student loan debt and rising tuition costs.

In the last year, the University of Bridgeport paid $4,000 in the face of such a lawsuit, although the school said it left open the option to go after the parent who filed for bankruptcy.

And last October, trustees for a Minnesota couple sued to claim tuition money from New York University, which a spokesman said was "deeply unfair" to the school.

NYU spokesman John Beckman told The Journal that the tactic of suing the academic institutions to recover tuition paid is "deeply unfair to that institution which has provided real value to the family."

The lawsuits are allowed to proceed as a result of a loophole in the bankruptcy code that permits trustees to sue in order to collect money which "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.

"But in the case of a child's tuition payment, the filer didn't get the value for the expenditure — the child did," reports the Journal.

In a 2010 case, Marquette University decided to fight the lawsuit arguing that the son of Carmen and William Leonard had received "reasonably equivalent value" for the amount they paid in tuition.

But the court said the Leonards "did not receive any 'value' for their tuition payments to Marquette," and that the school "points to no economic benefit to the Debtors, other than to speculate that a college education for Debtors' son may in the future enable him to be financially independent of his parents, and thereby relieve Debtors of any need to financially support their son."

"We were trying hard to recover," Carmen Leonard, who filed suit after she and her husband lost their jobs during the recession, told The Journal.

Eventually, Marquette was compelled to repay $21,527 to the trustees.

But not all cases are successful. That same year, a bankruptcy judge in New York ruled in favor of St. Andrews University, which was being asked to repay $35,055 in tuition costs.

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As more Americans find themselves filing personal bankruptcy claims in the face of heavy student loans, trustees charged with collecting monies owed to creditors have stumbled across a novel way to recoup the funds.
college tuition, parents bankruptcy, trustees, creditors
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2015-17-06
Wednesday, 06 May 2015 12:17 PM
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