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As part of an aggressive and growing tactic, bankruptcy trustees are starting to sue universities, and sometimes even the college students themselves, in an effort to take back tuition funds that had been paid years prior. The reason? Trustees feel the money that parents (now filing for bankruptcy) should have put that money towards their growing debts, rather than towards the cost of skyrocketing college tuition.

The Student Loan Debacle

There’s no doubt that student loan debt is one of the biggest issues facing millions of people across America. The fact that an 18-year-old can be approved for a loan of $100,000 and then have no job after graduating to be able to pay the debt off is a reality that far too many know. But the even harder reality is that there is very little a person with this debt can do. As a result, the nation is seeing dips in home purchases, and families are being started later and later because people simply do not have the money to start them.

Student loan debt is one of those debts that cannot be discharged in bankruptcy, unless under very specific circumstances where a person is able to prove extreme hardship. But now it seems bankruptcy trustees are taking another approach.

An example of this growing tactic can be seen at the University of Maryland, College Park. There, the university is fighting to keep $61,595.33 in tuition payments that a Connecticut couple began making for their son’s tuition in 2010. The school’s lawyer believes this new trend in pursuing universities, if left unchecked, will “drive a wedge between parent and child.”

Bankruptcy Trustees

When you enter the process of filing a bankruptcy, a bankruptcy estate is created. A court appointed trustee represents that estate, not you, nor your creditors. A trustee’s job is to collect all the the property in that estate (including nonexempt property), convert that property to cash, and then use that cash to pay creditors with valid claims.

Duties of the Bankruptcy Trustee

A bankruptcy trustee, in fulfilling the bankruptcy estate has the duty to do the following:

  • object to the filer’s claims for exemptions
  • object to creditors’ claims
  • protect and preserve the assets in the estate
  • pursue avoidance actions against creditors who received preferential or fraudulent transfers,
  • review records and investigate financial transactions where appropriate,
  • object to a filer’s discharge if the facts indicate the filer is not entitled to receive it under bankruptcy law.

Student Loan Lawsuits

The recent lawsuits being filed against universities and students are an unexpected consequence of bankruptcy. “It’d be horrible for a kid and their parent to have to go through this,” said Deborah Thorne, a professor of sociology at Ohio University who has researched the effects that financial distress can have on families.

While bankruptcy lawyers say students are also fair game when it comes to these lawsuits, it’s unlikely for a trustee to do so because most students are unable to replay the debt. The Wall Street Journal searched public records since 2008 and found just a handful of cases where the students themselves were sued. In 2006, a Boston College graduate was sued after his parents filed for bankruptcy. He eventually agreed to pay $10,000, while the college paid $3,230.

Even when the lawsuits prove to be unsuccessful, they can still be large expenses for families. In 2013, a Michigan couple’s daughter was sued for $12,305.70 in tuition for attending Wayne State University. The bankruptcy judge in that case declined the student’s request for a free lawyer. She was forced to hire Marshal Garmo, who luckily discounted his fees to a fraction of the $5,000 he normally charges.

There are even larger issues when a college is forced to return tuition money – a chance that the university will expel a child, deny a transcript, or ask for the money be returned.

Why is this Happening?

These tuition recovery lawsuits are a new trend in bankruptcy. Previously, tuition payments were so small that a bankruptcy trustee would not waste time pursuing them. But as the cost of higher education increases, and more parents step in to help out their children, it seems that this trend is here to stay and more of these types of lawsuits are to come.

According to a recent report by private student-loan lender SLM Corp. and market-research company Ipsos Public Affairs, forty-eight percent of parents that have children under the age of 18 are currently saving for college tuition.

Trustees Bringing the Lawsuits

A court-appointed trustees job is to recover as much money as possible from the estate to repay creditors. With that job, they are given the power to look for improper  or exorbitant payments and transfers that the filer made four to six years before filing for bankruptcy.

“They have a duty to bring [the lawsuits] unless they can make a judgment that the benefit is outweighed by the cost,” said Florida bankruptcy lawyer Charles Throckmorton.

Under the U.S. bankruptcy code, trustees can sue to take back money a bankrupt person spent several years prior to filing for bankruptcy protection if a trustee finds the person did not get “reasonably equivalent value” for that expense. Yet, the law does not define “reasonably equivalent value.”

For their services, trustees are paid a fee of $60 in addition to a percentage of what they recover from the bankruptcy estate. In 2013, trustees collected more than $3 billion from people and businesses from chapter 7 cases.

Bankruptcy Judge

While a bankruptcy judge may decide any matter of a bankruptcy case, such as the eligibility of the filer or what can be discharged, much of the process is left to the trustee.

Because of this, these types of cases have rarely gone before bankruptcy judges. Most of these cases are settled by the trustee that oversees them. In the few cases where the facts have been set in front of bankruptcy judges, they have disagreed.

In 2010, lawyers for Marquette University fought to keep $21,500 from Carmen and William Leonard’s bankruptcy estate. They argued that their son would be “afforded opportunities throughout his lifetime that he would not have been offered if it weren’t for his education.”

“Surely parents would not pay for the education of their children from their own funds, approve a tax millage increase or otherwise support any educational program if there was no benefit to be derived from an education,” Marquette University’s lawyers said.

Judge Thomas Tucker of the U.S. Bankruptcy Court in Detroit wrote in a 29-page opinion in 2011. In it he stated he wasn’t convinced that the benefit to the Leonards was “concrete and quantifiable.”

“Understandably, the [Leonards] may have felt a moral obligation to help their son pay for college,” Judge Tucker wrote. “While satisfying such a moral obligation and receiving such ‘peace of mind’ may be very real benefits that are personally quite important to the [Leonards], these intangible benefits are not ‘economic’ benefits to [them].”

But the Leonard’s case was unique, and a bit odd. The parents, Carmen and William, cosigned on the loan that provided the tuition money. Though the tuition money was returned, they still made payments on the loan, which was not discharged in the bankruptcy case.

Providing Top Education

It makes sense that as bankruptcy judges and trustees are ruling college education as unnecessary that colleges and universities are displeased with the trend.

“The universities which did what they promised to do—provide an education in exchange for tuition—are now being penalized,” says Hunton & William’s Joseph Esposito. He’s represent numerous colleges and universities.

Other Bankruptcies

Yet higher education is not the only industry to be hit by this new type of bankruptcy trustee action. Trustees attempting to recover funds for victims involved in Ponzi schemes in Minnesota and Florida were successful as they went after money that the Ponzi artists had donated to charities. Angered by this type of action, state lawmakers, passed rules making it harder for lawyers to take that money by placing older donations out of reach.

Robert Waldschmidt, a chapter 7 trustee near Nashville, once sued to take back $63 million that had been donated to a cystic fibrosis charity by a Ponzi scheme. “Sometimes you scratch your head and say, ‘This doesn’t feel right,’” he said.

Private Elementary and Secondary Schools

When it comes to private elementary and secondary schools (that often have very large tuition fees), trustees are less inclined to go after “lost funds.” Most states have laws requiring parents to take care of their children until they become adults. As a result these educations, and the money spent on them, are “warranted.”

Working with a Bankruptcy Attorney

Student loan debt can be overwhelming. At RHM LAW LLP, we genuinely care about our clients. We want to see our clients get back on their feet again. When you visit our offices, our attorneys will evaluate your financial circumstances and recommend a solution that works for you. Our lawyers and staff are committed to helping you overcome financial difficulty and get the debt relief you need.

We can take immediate action to address urgent financial problems. We can work to stop foreclosure, repossession, garnishment and/or any creditor harassment, allowing you room to breathe. Our experienced attorneys understand all aspects of Chapter 7 bankruptcy, Chapter 13 bankruptcy and bankruptcy alternatives, including home loan modification and personal and small business reorganizations. Trust us to identify a solution that works for you.

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