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Can trustees pull tuition payments back into a bankruptcy estate?

When you file of bankruptcy, the court will appoint a bankruptcy trustee. The bankruptcy trustee administers the case from reviewing all of you financial paperwork to liquidating property. The trustee is obligated to try to satisfy as many creditor claims as possible either in part or in whole.

The trustees are not just administrative assistants. They have significant power to complete their goal, including the authority to pull assets back into the bankruptcy estate. A trustee can file a lawsuit to obtain cars, cash or other property in situations in which a debtor never received a “reasonably equivalent value.”

A trustee most often uses this power in situations involving gifts to friends or family members given up to six years prior to the filing, a date that can vary from state to state. With the growing problems involving student loan debt, trustees are filing more lawsuits against colleges seeking the return of tuition payments.

You might ask yourself, “How does this work? Don’t students realize a benefit when they get an education?” You would be right, but these lawsuits involve parents who took out loans and then filed for bankruptcy, not students. Parents often take out federal student loans to pay for their children’s education.

In these instances, parents do not receive the benefit of education – so argues the trustees. The lawsuits argue that the money could and should have been used for other purposes if parents had debt problems. The trustees argue that the parents could have paid outstanding balances on mortgage, car or medical expenses in which they did receive a benefit.

Colleges can settle the disputes, and often do, but the private college Johnson & Wales University is fighting back against a recent lawsuit. The college argues that the power does not apply in this situation. They argue that the parents could not have used the money for any purposes other than tuition.

Who is right? We can't give you that answer yet, as the lawsuit is pending, but it is something to watch.

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