As many of you can attest college tuition payments are on the rise. You learned in Chapter 13 that a bankruptcy trustee has the power to set aside (avoid) a sale or other transfer of the debtor’s property and take the property back for the debtor’s estate (sometimes called the “claw-back” provision). This can occur when a debtor makes a fraudulent transfer to avoid having assets placed in the bankruptcy estate. For example, you anticipate that you will be filing a Chapter 7 Bankruptcy next month so you transfer your lake front vacation home to your sibling to “keep” for you until the bankruptcy is complete. The idea being that when you inventory your assets to be included in the bankruptcy estate your vacation home won’t be a part of it and, therefore, will not be lost. This is a fraudulent transfer. Under the U.S. Bankruptcy Code, trustees can sue to take back money that a bankrupt person spent several years prior to filing if a trustee determines that the person didn’t get “reasonably equivalent value” for that expense. In other words it becomes a suspicious transfer.
In a growing number of personal bankruptcy cases, trustees are moving to claw back tuition payments that insolvent parents made for their children. The trustees argue that the funds should be recovered to pay off the parents’ debts instead. The trustee’s theory is that if you were paying for college tuition for yourself it wouldn’t be a fraudulent transfer because you received equivalent value for the transfer. However, when you pay tuition for your adult children (which you are not legally required to do) you don’t receive anything in return which makes it a gift and a target for a fraudulent transfer claim. Since 2008 at least 25 colleges have been asked to return tuition money. This can result in a hold being placed on a student’s certificate of degree because of the outstanding obligation to the university and a standard practice in higher education.
Discuss the merits of this growing trend. Should college tuition be considered a fraudulent transfer?