Trustee Curveball

Posted by Kevin on May 12, 2015 under Bankruptcy Blog | Comments are off for this article

Just when you think, as a debtor’s attorney, you have Chapter 7 and Chapter 7 trustees figured out, the system and creative trustees throw you a curve ball.

A majority of my middle class to upper middle class debtors file because at least one spouse lost a high paying job.  Unfortunately, just because you lost your job does not excuse you from paying your financial obligations.   One of those obligations, at least in the mind of most husband and wife debtors, is the college tuition that they paid on behalf of their children.  When I ask my clients to put together a budget, many still list the college tuition payment that they could afford a year or two ago but not now.  Of course, that leaves nothing for creditors, but, as my clients protest, they have an obligation to their children.

I have had many a discussion with parents who think they belong in Chapter 7 because they are budgeting $1000 or more per month for tuition, when the reality is that the trustee will never allow such a payment, and will probably force that debtor into a Chapter 13.  What the debtor /parent cannot understand is that in the eyes of the bankruptcy trustee, the obligation to pay college tuition belongs to the son or daughter and not the parent.  While the parent looks at their child as a child, the trustee looks at them as a full grown adult because they are 18- capable of paying their own way.

Well, for those parents/debtors, some trustees around the country are adding insult to injury.  Not only are they prohibiting college tuition as an expense on the means test or Schedule J, they are threatening colleges and universities with actions to claw back tuition paid up to four years before the filing on the grounds that it is a fraudulent conveyance.  Now, we usually think of a fraudulent conveyance in terms of the debtor tries to screw his creditors by conveying his second home to his brother prior to filing.

As I stated  above, many parents believe that it is their obligation to pay their children’s tuition.  But, trustees have been pointing out that it is the student, and not the parents, who gets the benefit of college.  The quid pro quo for that benefit is payment of tuition.   Therefore, tuition is the obligation of the student and not the parent.  By paying the child’s tuition, the argument goes, it is just the same as deeding your home to a relative- your creditors do not get the benefit of that payment, and you, the debtor, are paying the obligation owed by a third party.

So, trustees are going after the colleges who, in more cases than not, are making deals and paying back some or all of the tuition to the trustee.  The colleges, in turn, are trying to squeeze the student to recoup the money.  Part of the squeeze on the student is to withhold diplomas or transcripts.  Of course, if the student is out of school for a few years, that type of leverage cannot work.

We are talking tuition here and not student loans.  Parents can be on the hook for Plus loans.  Most student loans are not dischargeable in bankruptcy.

The Wall Street Journal had a big article on this topic last week.  I have seen other articles on this issue over the last 6 months.  So do not be surprised if this issue comes up more and more in consumer bankruptcies.