I Want To File Bankruptcy But My Child Is Attending A Private Catholic School In New Jersey. Is That A Problem?

The answer is maybe.  In the last several years Chapter 7 bankruptcy trustee’s have become hungrier and have had to search a little deeper to net a dividend to unsecured creditors.  A bankruptcy trustee is a person, very often an attorney, is appointed to over see your Chapter 7 case and to ensure there are no unprotected funds that could be used to pay your creditors.  In recent years, Chapter 7 trustee’s have began pursing tuition payments already made by parents through a process called a claw-back.  In essence, the trustee could you previous paid tuition money to pay your unsecured creditors.  Even more recently Chapter 7 trustee’s have gone even further trying to claw back payments made for debtors’ children’s college tuition.

Bankruptcy can sometimes effect student's tuition payments made by their parents.

Bankruptcy can sometimes effect student’s tuition payments made by their parents.

A trustee can bring suit to recover money paid to third parties by a debtor if the debtor did not get “reasonably equivalent value” for the money that the debtor paid. The Bankruptcy Code does not define the term “reasonably equivalent value,” giving trustees some leeway when it comes to pursuing what they may consider to be improper pre-bankruptcy payments or transfers of money.  The Chapter 7 trustee’s position is that the payments qualify either as a gift, which allows for a 1 year look back period or a fraudulent transfer which encompasses a look back period that can range from 4-6 years.

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 responsible for fees provide financial statements when the make payments. This would aim to verify that the payee was solvent when the payment was made.  This is absolutely something that parents should be aware of if they are starting to navigate college payment options with their children.

There are things that can be done through a process known as bankruptcy estate planning which can help you strategize prior to filing bankruptcy so that your children’s education can gone on as uninterrupted as possible.  If you are considering filing bankruptcy and have children in either private school or in college be sure to consult with experienced bankruptcy counsel.


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