Are School Tuition Payments Fair Game For Bankruptcy Trustees in Parents' Personal Bankruptcy?

Parents who are forced to file for personal bankruptcy may be surprised to find that school tuition payments they made for their children years earlier could become the target of recovery by an aggressive bankruptcy trustee.  The theory of recovery in such cases is found in fraudulent transfer law, where all kinds of payments can be recovered if the transferor does not receive “reasonably equivalent value” for the payment and the payments are made at a time of insolvency. 

Usually, the “look-back” period for recovery of fraudulent transfers under state law is four years.  A bankruptcy trustee is entitled to rely on state law as a basis for recovery of fraudulent transfers in a bankruptcy case.

Recently, this theory of recovery was rejected for a bankruptcy trustee who sought to recover about $50,000 in tuition payments received by two private schools from the parents of two minor children for their children’s secondary education.  In Geltzer v. Xaverian High School (In re Akanmu), 2013 WL 6283582 (Bankr. E.D.N.Y. Dec. 4, 2013), the bankruptcy court held that such payments could not be recovered because they satisfied the parents’ legal obligation to support their minor children, which supplied “reasonably equivalent value” for the payments.  Although the court recognized that the parents could have satisfied their support obligation by sending the children to public school at no cost, it refused to open up such discretionary payments to recovery based on a trustee’s judgment that the expenditure was not reasonably necessary.  According to the court, simply because the parents chose to pay for their children’s education at a school of their choice did not change the fact that, by doing so, they satisfied their legal obligation to educate their children.

A more difficult issue arises, however, when the tuition payments at issue are made by parents for their children’s college education.  This is because a parent’s legal obligation of support ends when the child reaches the age of majority, which in Connecticut and most other states is 18 years of age.  Based on this distinction, several bankruptcy court decisions have held that tuition payments made by parents for their children’s college education may be recovered by a bankruptcy trustee on a fraudulent transfer theory.  As recognized by the court in Akanmu, however, two recent decisions from Pennsylvania bankruptcy courts have denied recovery of such payments, essentially on the basis that, while payment of college tuition is not a parent’s legal obligation, it is “something of a societal expectation that parents will assist with such expense if they are able to do so.”  Shearer v. Oberdick (In re Oberdick), 490 B.R. 687, 712 (Bankr. W.D. Pa. Mar. 27, 2013). In essence, this line of judicial thinking is loath to allow recovery of tuition payments either from innocent, unsuspecting schools or from the parents’ children, absent evidence that the tuition was paid for the purpose of shielding assets from creditors.

The Connecticut bankruptcy courts have yet to weigh in on this issue.

 

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