There is an ever-increasing trend in bankruptcy practice for court-appointed bankruptcy trustees suing college kids and their parents to recover money paid toward tuition.

Under 11 U.S.C. § 548, the trustee may reverse a fraudulent transfer of property made by the debtor in the two years preceding the debtor’s bankruptcy filing. 11 U.S.C. § 544 allows the trustee to look back even further (in Utah- four years) if allowed by pertinent state laws. A transfer will be “actually” fraudulent where it is made with “the intent to hinder, delay or defraud creditors.” Similarly, a transfer will be “constructively” fraudulent where the debtor does not “receive reasonably equivalent value and the debtor was insolvent at the time of the transfer or became insolvent as a result thereof.” Once reversed, the trustee may recover the value of the fraudulent transfer from the party that received the transfer for the benefit of the debtor’s creditors pursuant to 11 U.S.C. § 550.

Parents who file for bankruptcy after paying for the skyrocketing cost of college tuition can face scrutiny from trustees who argue that the money should have been spent on their own growing debts, as reported in The Wall Street Journal.

Under the U.S. bankruptcy code, trustees believe that they can sue to take back money that a bankruptcy debtor spent several years before filing for bankruptcy if a trustee finds that the person didn’t get “reasonably equivalent value” for that expense. The law doesn’t define “reasonably equivalent value.” So- most of these cases, the trustees seek to reverse the tuition payments as “constructively fraudulent transfers.”

The trustees argue that the debtor-parents who are paying the tuition fail to receive “reasonably equivalent value” since the child is the one actually getting the educational benefit.

According to the Massachusetts law firm of Duane Morris,  “courts have issued conflicting opinions concerning these types of avoidance actions. For example, some courts have relied upon the “societal expectation” that parents assist with the cost of their child’s post-secondary education. See, e.g., Trizechahn Gateway, LLC v. Oberdick (In re Oberdick), 490 B.R. 687, 712 (Bankr. W.D. Pa. 2013). Conversely, some courts have held that such payments are avoidable because the benefits received by parents in exchange are not “concrete” or “quantifiable,” or because the parents are under no legal obligation to cover these types of costs for adult children. See, e.g., Gold v. Marquette Univ. (In re Leonard), 454 B.R. 444, 457 (Bankr. E.D. Mich. 2011).”

Duane Morris also reports about a Massachusetts case, DeGiacomo v. Sacred Heart University, Inc. (In re Palladino), Adv. Pro. No. 15-01126, 2016 Bankr. LEXIS 2938 (Bankr. Mass. Aug. 10, 2016), the Massachusetts bankruptcy court concluded that the debtors’ pre-bankruptcy payment of their child’s college tuition was not avoidable as a constructively fraudulent transfer because the debtors received reasonably equivalent value. The bankruptcy court held that “[a] parent can reasonably assume that paying for a child to obtain an undergraduate degree will enhance the financial well-being of the child which in turn will confer an economic benefit on the parent.” Accordingly, the court concluded that this benefit “constitutes a quid pro quo that is reasonable and reasonable equivalence is all that is required” to shield a transfer from avoidance as a constructively fraudulent transfer.

This is an interesting issue to watch. Many people predict that student loan repayment is reaching crisis levels, like the housing bubble did in 2008. I am not convinced by this argument, because the research doesn’t support it. (Urban Institute, University of Maryland, Education Review, Forbes. ) However, the rising cost of colleges and the increased use of student loans is a concern that needs to be brought under control.

I believe that there is a concrete financial benefit that parents receive by assisting in their children’s education. Parents assisting adult children with college tuition should not be sued because they end up in bankruptcy three years after offering the assistance. Unless the trustee can prove some sort of concrete fraudulent intent, the assistance should be left alone.

If you find that you cannot keep up with your debt because of unfortunate financial circumstances- call today to see if bankruptcy is a viable option for you.