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Why are bankruptcy trustees taking colleges to court?

| Apr 21, 2016 | Firm News, Personal Bankruptcy

The vast majority of parents want nothing more than to see their children succeed both personally and professionally. While the former can typically be accomplished via significant emotional investment, the latter can typically be accomplished via significant financial investment.

Indeed, many parents end up devoting thousands or even tens of thousands of dollars toward their child’s scholastic endeavors in the hopes that it will put them on the right path to financial security and career satisfaction. In fact, this spending is now going beyond the elementary school and high school level, with more parents than ever helping subsidize the pursuit of a college degree.

Interestingly enough, this well-intentioned action by parents is actually creating something of a stir in the bankruptcy courts. That’s because court-appointed bankruptcy trustees are now filing lawsuits against colleges across the nation seeking to recover tuition money previously paid by parents who are now seeking bankruptcy protection.

This is actually something of a departure from the not-too-distant-past, when trustees actually ignored tuition payments as they were viewed as too small to justify the time and effort otherwise required to recover them.

Recent reports, however, show that over a dozen lawsuits have been filed against colleges — including New York University, Michigan State University and Villanova University — since 2014, and that they have netted over $275,000 in returned tuition payments from academic institutions eager to settle the matter rather than pursue costly litigation.

While the bankruptcy code isn’t clear on this precise issue, trustees have claimed that bankruptcy law authorizes them to recoup money spent by filers (i.e., parents) who failed to secure “reasonably equivalent value” in return.

As you might imagine, this lack of clarity in the code has also created something of a division among the bankruptcy courts as to whether these tuition clawback demands by trustees are valid. Indeed, two universities are now planning to move ahead with lawsuits that could ultimately force a definitive legal answer.

It’s worth noting that Rep. Chris Collins (R-NY) introduced a bill last year that was specifically designed to block trustees from filing these types of lawsuits against colleges.

It will be interesting to see how this matter ultimately plays out.

In the meantime, those people with any questions about bankruptcy protection should give serious consideration to speaking with an experienced legal professional who can not only provide answers, but explain the law and help allay their fears

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