So your child is attending college to get a good education, and you are able to afford to make the tuition payments rather than borrow the money. But recent job loss, disability, or some other financial hardship has forced you to file a chapter 7 bankruptcy.
Now your bankruptcy trustee is threatening to sue the school if they do not send back to him the tuition you paid, so that that money can be used to pay your creditors! What happened?
How Can They Do This?
Well, one of the basic principles of bankruptcy law is that all creditors of a particular type (e.g. secured or unsecured) be treated equally. No preferential treatment should be given to some to the detriment of others.
Another principle is that debtors be allowed to expend money for expenses that are “reasonable and necessary for the support of the debtor or a dependent of the debtor."
These two principles have been tested more and more over the years as bankrupt debtors send their children to college and pay the tuition outright, rather than incur student loan debt.
Trustees in chapter 7 bankruptcies have been threatening schools with suit in order to get them to return to them moneys paid by the debtors for tuition, and the rising cost of education have led to tuition balances in amounts that justify the expense of doing so.
The basis for this position goes back to these two principles. First, why should your creditors go wanting so you can pay for your child’s college education? You are not benefitting from the education, your child is, so nothing is being paid for that comes into your bankrupt “estate” as an asset.
Second, many trustees are arguing that the tuition expense is not “reasonably necessary for the support of a dependent.” After all, the child can take out student loans to pay for it or forgo the education until his or her parents’ financial problems are resolved.
Will This Always Happen?
Fortunately, not all bankruptcy judges are agreeing with this position. They have ruled that parents have a “moral obligation” to pay their children’s tuition. As reported in The Wall Street Journal, this happened in Pittsburgh in 2013, where the judge denied a trustee’s attempt to get back $82,536.22 in paid tuition.
Therefore, although this is an increasing trend, it is not necessarily one that will always take place. No U.S. Circuit Court or the Supreme Court has made a definitive ruling. However, it is something for anyone in this position to discuss with his attorney before filing.
What Do You Think?
But what do you think? Should parents deep in debt be able to pay tens of thousands of dollars for their children’s college education rather than pay their debts? Or do parents have an overriding moral obligation to do so that trumps the interests of creditors? Let me know in the comments!