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Bankruptcy May Be Your Option

College tuition target of clawback in personal bankruptcy

As the school year ends, many graduates will be embarking on their college careers.  Obviously, paying tuition is a necessary part of that experience. But when a student's family files bankruptcy, are those tuition payments something that it should have invested in the child's education, or would it have been better spent on the family's unpaid bills? Those questions are currently at the heart of a debate among colleges, lawmakers and bankruptcy trustees.

To better understand this dilemma, it is important to know the role of a bankruptcy trustee. The trustee is appointed to gather all of the debtor's assets to be used to pay as much of the debt as possible. Because the trustee wants as much money as possible, he or she can look back at recent transactions that the debtors have made to determine whether those were appropriate, or whether the proceeds of those transactions should have been used to pay off creditors. If the trustee finds unnecessary purchases or questionable transfers to mothers within the window of time, even up to six years ago, those transactions may be voided and the money returned to the bankruptcy estate to pay off creditors. These are often referred to as "clawbacks," or reaching back to retrieve money that should have been in the pot to pay creditors.

Now trustees are looking back at college tuition as a possible clawback target. The theory is that, in addition to the argument that the money could have been spent on paying debts that ultimately resulted in bankruptcy, the parent who is filing for bankruptcy did not get value for the tuition. The child is the one who benefited from the education. Public records show that at least 25 colleges have been the target of clawbacks. Of those, more than a dozen returned the funds to the trustee.

The value of a college education varies from one individual to another so it would be difficult for trustees to cast a net blanketing college tuition as a clawback option. But as the trend continues to grow, the advice of an Ohio bankruptcy attorney may be crucial in determining whether tuition you have paid for your child's education may be targeted by a trustee. While the burden is ultimately on the college to return the funds, the overall impact of the decision could affect your bankruptcy estate as a whole.

Source: Wall Street Journal, "Bill Proposes Ban on Tuition Clawbacks in Bankruptcy," Katy Stech, May 5, 2015

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