BANKRUPTCY
Definition: A legal proceeding involving a person or business that is unable to repay outstanding debts
Bankruptcy Trustees Claw Back College Tuition Paid for Filers’ Kids
Several schools have paid up in an attempt to avoid lawsuits
By KATY STECH
May 5, 2015 7:50 p.m. ET
Soaring college tuition payments are drawing attention from unexpected quarters: bankruptcy courts.
In a growing number of personal bankruptcy cases, trustees responsible for collecting money for creditors have moved to claw back tuition payments that insolvent parents made for their children. The trustees argue the funds should be recovered to pay off the parents’ debts instead. In many cases, they’re succeeding.
In February, the University of Bridgeport agreed to return $4,000 after being sued by the trustee charged with recovering money for creditors after Orlando M. Morales’s parents filed for chapter 7 bankruptcy in 2013. The school said in a court filing it reserved the right to go after Mr. Morales himself. An attorney for the university declined to comment.
New York University was sued in October to turn over $27,152 for a Minnesota couple’s debts. Pace University quickly settled a lawsuit in September, agreeing to pay $23,290.80.
In a statement, NYU spokesman John Beckman said that attempts to claw back tuition money are “deeply unfair to that institution which has provided real value to the family.” A spokesman for Pace declined to comment.
Although no one keeps statistics on how often such cases arise, chapter 7 trustees and consumer bankruptcy lawyers say the trend was nonexistent several years ago and that they expect the number of tuition-related lawsuits to rise in the future.
A search of public filings across the country, dating back to 2008, turned up at least 25 colleges that have been asked to return money in recent years. More than a dozen complied.
Trustees have broad powers to claw back funds for creditors. Typically this means going after ill-timed transfers of filers’ homes, cars, cash or other assets that may have gone to family members or otherwise stashed away.
Under the U.S. bankruptcy code, trustees can sue to take back money that a bankrupt person spent several years before filing for protection if a trustee finds that the person didn’t get “reasonably equivalent value” for that expense.
But in the case of a child’s tuition payment, the filer didn’t get the value for the expenditure—the child did. That wrinkle permits trustees to recover those funds.
“The law is not all that difficult, but a lot of people struggle with it because it just seems wrong,” said Jeffrey Hellman, a Connecticut-based lawyer who has helped recover more than $98,000 from colleges.
Average annual tuition and fees for private colleges now amount to $31,231 a year and have risen by 146% over the past three decades, according to the College Board. That growth has left tuition payments large enough to be worth the trouble of a suit.
Steve Feldman of West Bloomfield, Mich., filed for bankruptcy protection in July 2011 after selling a yoga business that didn’t yield the profits he had hoped for. At the time, he owed more than $45,000 in taxes, according to court records.
Years before he filed, he had invested funds to pay tuition for his three daughters. One of the schools, the University of Arizona, turned over $8,500 in 2013 after the trustee in the chapter 7 case threatened to sue.
Chris Sigurdson, a spokesman for the school, declined to comment on Mr. Feldman’s case but said that “placing a hold on a student’s certificate of degree because of an outstanding financial obligation to the university is a standard practice in higher education.”
The school allowed Mr. Feldman’s daughter to graduate on time after—but only after he signed an installment agreement to pay $250 a month to settle the bill. He has seven payments left.
In the same year, the trustee in the Feldman case sued the University of Michigan to recover a total of $12,760 in tuition payments for another daughter. In a settlement agreement, the school relinquished $6,000. A spokesman for the university declined to comment.
Although the number of personal bankruptcy filings has fallen sharply since the recession, more than 600,000 people and couples filed chapter 7 in 2014, according to the U.S. Administrative Office of the U.S. Courts.
Filers get a fresh start when the judge cancels their debts—though certain tax payments, child support and student loan debt typically remain. A filer’s spending history comes under scrutiny for any payments that can be recovered. The job falls to trustees—lawyers and accountants named by the bankruptcy court—to find as much money as possible to settle such bills.
In 2010, Marquette University unsuccessfully fought to keep $21,527 being sought to pay Carmen and William Leonard’s bankruptcy estate. Mrs. Leonard says she and her husband had both lost their auto-industry jobs during the recession. The fight over tuition paid for their son came while they were downsizing and trying to find new jobs.
“We were trying hard to recover,” said Ms. Leonard, who says her son was still allowed to graduate, despite the school forfeiting tuition. “It was a lot of anxiety.”
A spokesman for Marquette didn’t return requests for comment.
Orlando M. Morales’s parents, Orlando and Michelle, filed for bankruptcy in August 2013 after both lost their jobs. They saw their household income fall from $118,425 in 2011 down to just their unemployment benefits. The lack of income caused them to miss payments on the $251,000 mortgage owed on their Ansonia, Conn., home.
In addition to paying their son’s tuition at the University of Bridgeport, they also paid about $10,560 to Post University in Waterbury, Conn., where he had transferred. In the court proceedings to recover that money, Post University officials argued that the funds were a “reasonable and necessary expense.” The school entered into a settlement agreement to return $5,000.
A few judges have rejected these requests by trustees, ruling that parents have a moral obligation to pay for a son or daughter’s tuition.
One such case was in Pittsburgh, where court-appointed trustees tried to get two partners at collapsed law firm Titus & McConomy LLP to repay their childrens’ tuition. In March 2013, U.S. Bankruptcy Judge Thomas Agresti ruled against an attempt to recover $82,536.22 spent by attorney David Oberdick on tuition at the University of Chicago and Robert Morris University.
“Even though there may not strictly speaking be a legal obligation for parents to assist in financing their children’s undergraduate college education,” Judge Agresti wrote in his opinion, “there is something of a societal expectation that parents will assist with such expense if they are able to do so.”
But by no means is there a judicial consensus on the issue.
New York bankruptcy Judge Cecelia Morris ruled in 2010 against Shelton Lindsay, a Rhinebeck entertainment-industry consultant who paid $35,055 for his son’s tuition at St. Andrews University.
“The Court is not aware of any law requiring a parent to pay for a child’s college education,” Judge Morris said in her ruling.
Several schools have paid up in an attempt to avoid lawsuits
By KATY STECH
May 5, 2015 7:50 p.m. ET
Soaring college tuition payments are drawing attention from unexpected quarters: bankruptcy courts.
In a growing number of personal bankruptcy cases, trustees responsible for collecting money for creditors have moved to claw back tuition payments that insolvent parents made for their children. The trustees argue the funds should be recovered to pay off the parents’ debts instead. In many cases, they’re succeeding.
In February, the University of Bridgeport agreed to return $4,000 after being sued by the trustee charged with recovering money for creditors after Orlando M. Morales’s parents filed for chapter 7 bankruptcy in 2013. The school said in a court filing it reserved the right to go after Mr. Morales himself. An attorney for the university declined to comment.
New York University was sued in October to turn over $27,152 for a Minnesota couple’s debts. Pace University quickly settled a lawsuit in September, agreeing to pay $23,290.80.
In a statement, NYU spokesman John Beckman said that attempts to claw back tuition money are “deeply unfair to that institution which has provided real value to the family.” A spokesman for Pace declined to comment.
Although no one keeps statistics on how often such cases arise, chapter 7 trustees and consumer bankruptcy lawyers say the trend was nonexistent several years ago and that they expect the number of tuition-related lawsuits to rise in the future.
A search of public filings across the country, dating back to 2008, turned up at least 25 colleges that have been asked to return money in recent years. More than a dozen complied.
Trustees have broad powers to claw back funds for creditors. Typically this means going after ill-timed transfers of filers’ homes, cars, cash or other assets that may have gone to family members or otherwise stashed away.
Under the U.S. bankruptcy code, trustees can sue to take back money that a bankrupt person spent several years before filing for protection if a trustee finds that the person didn’t get “reasonably equivalent value” for that expense.
But in the case of a child’s tuition payment, the filer didn’t get the value for the expenditure—the child did. That wrinkle permits trustees to recover those funds.
“The law is not all that difficult, but a lot of people struggle with it because it just seems wrong,” said Jeffrey Hellman, a Connecticut-based lawyer who has helped recover more than $98,000 from colleges.
Average annual tuition and fees for private colleges now amount to $31,231 a year and have risen by 146% over the past three decades, according to the College Board. That growth has left tuition payments large enough to be worth the trouble of a suit.
Steve Feldman of West Bloomfield, Mich., filed for bankruptcy protection in July 2011 after selling a yoga business that didn’t yield the profits he had hoped for. At the time, he owed more than $45,000 in taxes, according to court records.
Years before he filed, he had invested funds to pay tuition for his three daughters. One of the schools, the University of Arizona, turned over $8,500 in 2013 after the trustee in the chapter 7 case threatened to sue.
Chris Sigurdson, a spokesman for the school, declined to comment on Mr. Feldman’s case but said that “placing a hold on a student’s certificate of degree because of an outstanding financial obligation to the university is a standard practice in higher education.”
The school allowed Mr. Feldman’s daughter to graduate on time after—but only after he signed an installment agreement to pay $250 a month to settle the bill. He has seven payments left.
In the same year, the trustee in the Feldman case sued the University of Michigan to recover a total of $12,760 in tuition payments for another daughter. In a settlement agreement, the school relinquished $6,000. A spokesman for the university declined to comment.
Although the number of personal bankruptcy filings has fallen sharply since the recession, more than 600,000 people and couples filed chapter 7 in 2014, according to the U.S. Administrative Office of the U.S. Courts.
Filers get a fresh start when the judge cancels their debts—though certain tax payments, child support and student loan debt typically remain. A filer’s spending history comes under scrutiny for any payments that can be recovered. The job falls to trustees—lawyers and accountants named by the bankruptcy court—to find as much money as possible to settle such bills.
In 2010, Marquette University unsuccessfully fought to keep $21,527 being sought to pay Carmen and William Leonard’s bankruptcy estate. Mrs. Leonard says she and her husband had both lost their auto-industry jobs during the recession. The fight over tuition paid for their son came while they were downsizing and trying to find new jobs.
“We were trying hard to recover,” said Ms. Leonard, who says her son was still allowed to graduate, despite the school forfeiting tuition. “It was a lot of anxiety.”
A spokesman for Marquette didn’t return requests for comment.
Orlando M. Morales’s parents, Orlando and Michelle, filed for bankruptcy in August 2013 after both lost their jobs. They saw their household income fall from $118,425 in 2011 down to just their unemployment benefits. The lack of income caused them to miss payments on the $251,000 mortgage owed on their Ansonia, Conn., home.
In addition to paying their son’s tuition at the University of Bridgeport, they also paid about $10,560 to Post University in Waterbury, Conn., where he had transferred. In the court proceedings to recover that money, Post University officials argued that the funds were a “reasonable and necessary expense.” The school entered into a settlement agreement to return $5,000.
A few judges have rejected these requests by trustees, ruling that parents have a moral obligation to pay for a son or daughter’s tuition.
One such case was in Pittsburgh, where court-appointed trustees tried to get two partners at collapsed law firm Titus & McConomy LLP to repay their childrens’ tuition. In March 2013, U.S. Bankruptcy Judge Thomas Agresti ruled against an attempt to recover $82,536.22 spent by attorney David Oberdick on tuition at the University of Chicago and Robert Morris University.
“Even though there may not strictly speaking be a legal obligation for parents to assist in financing their children’s undergraduate college education,” Judge Agresti wrote in his opinion, “there is something of a societal expectation that parents will assist with such expense if they are able to do so.”
But by no means is there a judicial consensus on the issue.
New York bankruptcy Judge Cecelia Morris ruled in 2010 against Shelton Lindsay, a Rhinebeck entertainment-industry consultant who paid $35,055 for his son’s tuition at St. Andrews University.
“The Court is not aware of any law requiring a parent to pay for a child’s college education,” Judge Morris said in her ruling.
The college is legally proceeding involving a person for education