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Bankruptcy Law

New bankruptcy clawback concept: Trustee pushes college, student to cough up tuition paid by parents

Traditionally, college tuition wasn’t at issue in bankruptcy cases, in part because it didn’t amount to much.

But with annual payments ranging from $40,000 to $50,000 at some private institutions, and over $30,000 on average, bankruptcy trustees have started focusing on tuition paid by financially struggling parents as a potential clawback opportunity in recent years, the Wall Street Journal (sub. req.) reports. The Bankruptcy Beat page of the Wall Street Journal (sub. req.) also has a story.

Fearful of the expense and uncertainty of litigation, colleges, universities and even the students themselves may be willing to settle for a fraction of the total sought by the trustee rather than fight the clawback attempt in court. Among the potential issues in such cases is whether the tuition money was a fraudulent transfer or a voidable preference by the debtor while insolvent.

However, the law is uncertain and still developing, so some who have fought such clawback attempts have won, the WSJ reports. Over $80,000 in tuition paid by a partner at a collapsed Pittsburgh law firm, Titus & McConomy, was not recoverable, U.S. Bankruptcy Judge Thomas Agresti ruled in 2013.

“Even though there may not strictly speaking be a legal obligation for parents to assist in financing their children’s undergraduate college education,” Agresti wrote, “there is something of a societal expectation that parents will assist with such expense if they are able to do so.”

A Hunton & Williams client alert last year summarizes additional cases.