What’s Causing the Tuition Claw Back Lawsuit Phenomenon?

by San Antonio Attorney

Tuition claw back lawsuits are a recent phenomenon. In the past, tuition expenses were so little that court-appointed trustees usually disregard them.  But recently, more and more parents are helping out to pay for their kids’ college expenses, causing bankruptcy experts to believe that more of these lawsuits will come.

Nearly fifty percent of parents with underage children are saving money for university or college tuitions, according to SLM Corp. and Ipsos Public Affairs.  Most families saving for education have put aside about $10,000.

Driving the court legal actions are court-appointed trustees who are responsible for recovering as much money as they can to pay back creditors.  The laws in most states give them power to seek out improper transfers and payments made years before a debtor filed for bankruptcy.

The U.S. Bankruptcy Code states that trustees can take legal action to recover money that a bankrupt consumer spent before declaring bankruptcy if a trustee has reason to believe that the debtor didn’t obtain “reasonably equivalent value” for that expenditure. However, the law doesn’t provide definition of what is “reasonably equivalent value.”

Trustees charge $60 in fees and get a certain percentage from what they recoup.  Records show that in 2013 trustees amassed about $3 billion from individuals and businesses in Chapter 7 bankruptcies alone.

Bankruptcy judges have hardly ever come to a point when they need to evaluate whether such actions by trustees are legitimate since most of them settle.  But when they had to give a ruling, bankruptcy judges have disagreed with the trustees.

Aside from higher education, there are other industries that have been caught off-guard by the claw back principle of bankruptcy law. Trustees seeking to recover money for victims of Ponzi schemes in Florida and Minnesota were able to successfully recover money that the originators of the schemes had contributed to nonprofit organizations.  State lawmakers, infuriated by the lawsuits, created rules that caused it to be more difficult for lawyers to recover that money.

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