Bankruptcy Judge Examines Whether Tuition Payments Belong to the Parents or the Government

by San Antonio Attorney

A bankruptcy judge is finding out whether Johnson & Wales University must turn over tuition money after parents of a former student filed for bankruptcy.  She is trying to find out who exactly paid the educational costs, whether it is the parents or the government.

Chief Judge Julie A. Manning of the United States bankruptcy court, District of Connecticut, required that lawyers file additional documents in the case that arose after Robert and Jean DeMauro filed for bankruptcy last year.  In the lawsuit, a bankruptcy trustee made an objection to claw back the tuition payments because the money did not benefit the bankrupt couple – their daughter did.

The money that was spent came from the U.S. Department of Education’s Parent PLUS loan program, not from them.  Approximately 3.1 million parents have borrowed a total of $68 billion under the education loan program funded by the federal government.

During the Sept. 16th hearing, Judge Manning challenged the bankruptcy trustee’s effort to get the money back by asking for an explanation on how that money becomes a property of the debtor if the government had provided for the loan.

Trustee attorney Jeffrey Hellman referred to the Parent PLUS loan contract, which states Mr. DeMauro as the only person liable for the loan payment.  According to Hellman, Mr. DeMauro owns the money because he is accountable for the loan repayment.  It is similar to a situation when a buyer of a car applies for a loan, and the lender sends the payment straight to the car vendor.

Judge Manning scheduled another hearing on December to revisit the case.

There have been several cases of bankruptcy trustees fighting against educational institutions over tuition money from a loan that links parents to the student-loan debt of their children.

Experts say this is a new trend. In the past, the amount of tuition payments was very small that bankruptcy trustees would not pursue them. But because college costs are rising and more parents contribute to help their children, bankruptcy experts foresee an increasing number of cases like this in the future.

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