Article in today’s WSJ, “What’s Behind Bankruptcy Lawsuits Over College Tuition?” states that parents who forego paying their own debts and elect to instead pay their kid’s college tuition may be setting their kid up for a lawsuit. The article points out two examples, “A Boston College graduate, for example, who was sued in 2006 after his parents filed for bankruptcy and eventually agreed to pay $10,000. The college itself paid $3,230…[and] When a Michigan couple’s daughter was sued in 2013 for $12,305.70 in tuition for Wayne State University, a bankruptcy judge declined the student’s request for a free lawyer… Tuition recovery lawsuits are a new phenomenon. Historically, tuition payments were so small that a court-appointed trustee wouldn’t waste time pursuing them. But as college costs rise and more parents chip in to help their kids, bankruptcy experts predict more of these lawsuits to come.”
Hope the link below works. Seems a bit cutthroat to me to go after a kid when the parents elected to pay tuition in lieu of their debts, what am I missing?
http://blogs.wsj.com/bankruptcy/2015/05/06/whats-behind-bankruptcy-lawsuits-over-college-tuition/?mod=e2fb
Bankruptcy law requires the trustee to ‘claw back’ payments made to others that were above what was required, that could be deemed a gift. Let’s say you had three credit cards and, knowing you were going to file bankruptcy, decided to pay one in full but not the other two. Law allows trustee to claw back that big payment and divide it among the three accounts.
Here the trustees are saying the parents made a big payment to the university on behalf of the student, and there was no obligation to pay for tuition so the university, as the beneficiary of the big payment, should give it back to the parents so they can pay their bills that they are required to pay. The kids don’t have it, so the trustees are following the money to the schools.
I get that part towin, but why sue the kids?? the article specifically pointed to two examples where the students were brought into the suit? How awful for those families to have to go through a suit at odds with each other!
Because the kids are who got the payments. Parents ‘gave’ the kid the tuition money, and kid paid his tuition with it. Even if parents directly paid the tuition, it is no different than if the parent paid for a new car or the kids’ mortgage, or if the parents just gave a large gift of money to the kid (which many, many people have done just before filing bankruptcy). The child, a legal adult to whom the parents had no legal obligation to educate, received a preferential payment from the parent.
I paid DS’s HS for an expensive, school-organized poverty tourism trip-- ahem, I mean, summer study abroad in developing country-- but he got WL by one of his favorite schools. Can I sue the HS to clawback the money I paid for that unfruitful CV padding?
@GMTplus7 maybe you should sue the country to which DS traveled for not providing compelling enough application essay material ; )
ok…but I wonder if this would only be done to children who were above age 18?
For instance, if the college child were 17, what would the BR court do?
What if the child were 8 and going to a pricey K-12 school??
The end of the linked article mentions a case where the minor child’s tuition at K-12 was not recoverable since it was a parental obligation (NY). However a quick google comes up with a law firm article saying even that is up for grabs. What is more worrisome is that they mention payments 4-6 years prior could be clawed back. This is not merely voidable preferences of some short period prior to bankruptcy. It is easily foreseeable that 4 to 6 years prior everything was fine and all bills were being paid, but later on business went south, job was lost, big medical bills piled up etc. etc. Perhaps those would not be “fraudulent” on the facts, and some of these other cases were somehow different (perhaps preexisting large debt).
I didn’t look for the full opinion of the case noted in the linked article, but there was some issue with a loan that was cosigned by the parents for the child’s tuition. Perhaps this is what put them over the edge financially, and that is why the other creditors were complaining. That would be understandable that those other creditors would complain.
Parents should think long and hard about borrowing on their own assets for the children’s education, especially if it puts their financial status in peril. Additionally, perhaps the Judge was trying to teach some kind of lesson to society in general that if such college payments/borrowings are in effect a cause of the bankruptcy (we can imagine such a scenario easily) that the other creditors should not suffer. I think a lot of issues would need to be examined- eg. old debt versus new etc. Also don’t be cavalier about filing for bankruptcy if you have made these possibly huge payments on behalf of your kids.
https://www.hunton.com/files/News/c9f98ab6-8f24-45fe-a991-2644c9c58091/Presentation/NewsAttachment/5a3842db-72cf-4876-8cf3-2a404f447b59/Tuition_Clawback_in_Bankruptcy_Cases.pdf
In Hunton and Williams article, they note that in PA, college tuition is considered a reasonable expense (not fraudulent transfer), but other states differ. Bankrupcy law is a federal law, but no cases have been brought up yet at higher levels.
Interesting. Preferences were never intended to include this type of thing…goes too far IMO.
I suspect we are looking at cases where they chose to pay tuition or those loans bc the college loan is not discharge-able. So pay it off (or tuition in lieu of loan) and discharge everything else.
I agree these probably aren’t ‘average Joe’ bankruptcies but ones where personal and business assets were co-mingled and many preference payments were made to favored creditors. I doubt the trustees are concerned the debtor paid the college rather than a credit card or medical bill, but that $50000 was paid for tuition in September and the business failed in November.
“Because the kids are who got the payments. Parents ‘gave’ the kid the tuition money, and kid paid his tuition with it. Even if parents directly paid the tuition, it is no different than if the parent paid for a new car or the kids’ mortgage, or if the parents just gave a large gift of money to the kid (which many, many people have done just before filing bankruptcy). The child, a legal adult to whom the parents had no legal obligation to educate, received a preferential payment from the parent.”
That’s interesting - because it seems in conflict with how the gift tax is handled. IOW, I (or grandpa) can’t legally give over $14,000 to my adult child without triggering a tax, but I (or grandpa) can pay their tuition directly and it’s not counted as a gift. I’m not knowledgeable in this area at all but it seems that the tax code treats money-paid-for-tuition differently from money-handed-to-kid-with-which-he-pays-tuition.
Apropos of nothing, I went to college with a girl from a wealthy family in South Africa and they couldn’t get money out of the country - so (from what I heard, and this could be a tall tale) her parents would apparently overpay the tuition substantially) and then the college would refund my friend the difference. I wonder if any college has been accused of doing that - e.g., “overcharging” tuition to give back money to somebody. I would imagine that’s illegal!
I agree with posters that clawing back beyond the preference period and treating education costs as preferential payments is overreaching.
PG I can see that working because when my DSs scholly was applied to tuition it caused an overpayment and refund was sent to my son. In your example, School wouldn’t need to overcharge-the folks just overpay and request that any refund be applied as a refund or credit to the student’s acct to draw from.
@Pizzagirl - International students must demonstrate that they can cover the full Cost of Attendance or they can’t get their student visas. When there is currency control and it is difficult to exchange money for other purposes often a government will still recognize that a student has legitimate expenses beyond tuition, fees, meals, housing, books & materials, and will make it possible for a student to access whatever the college/university includes in the full COA. It doesn’t surprise me at all that a deal such as the one you have described would be worked out between the college/university and the family - possibly with full agreement of the currency control office itself.
Any taxes a gift generates are not the concern of the trustee. Two different laws. Paying tuition is specifically exempt from the gift tax law.
People get all excited about giving more than $14000 will cause a gift tax. All it really requires is a form to the IRS and the excess over $14000 goes against lifetime gifts. Since current estate tax exemption is over $5M, I wouldn’t worry about giving $14,001 or even $50k (in my case I’m not worried about it at all!).
It’s easy to see the view from the trustee’s chair. The parents ‘had’ $60k and paid the school rather than pay the medical bill, the credit cards, the business creditors, the employee’s taxes. It really is no different, in the eyes of the trustee, than if the parents had bought the child a house or a car or an airplane. If it were one of those tangible assets, the trustee would bring that back into the estate. Since it is an intangible asset, the trustee goes for the tuition refund.
The laws definitely do not mesh. The bankruptcy court is claiming the parents have no duty to pay for the education, the IRS says the parents can take tax credits and deduction when they do provide the education money, and the schools say “Pay Us Now, and we don’t care where the money comes from.”
“PG I can see that working because when my DSs scholly was applied to tuition it caused an overpayment and refund was sent to my son. In your example, School wouldn’t need to overcharge-the folks just overpay and request that any refund be applied as a refund or credit to the student’s acct to draw from.”
I just got a $4K credit from my son’s school - he got charged for room & board for the quarter when indeed he’s an RA and gets that for free; we accidentally overpaid without realizing and just got the funds deposited back. But I get the sense this was at a much greater magnitude. Of course, this was also 30 years ago, who knows. Nothing was electronic in those days, so it could very well be - the family sent a check, the university cashed it and then handed her the cash. I bet it was a lot less traceable than it would be today.
yup, both of my kids’ schools give us an option of where and who gets any refund. I’ve had up to $4k refunded to my DS’ account. At tax time, the T-1098 only shows “tuition and fees” charged and “tuition and fees” paid. Overpayments or refunds are not posted anywhere to the IRS, however, they do show up on the student’s accounts. If international parents want to overpay and because the student didn’t earn the refund money, she wouldn’t be taxed on it in the US, nothing to trace back I would think? However, I don’t know much about that Happymom’s explanation about COA sounds right.
Right - but there’s a difference between correcting a mistake (like my son being charged for room and board he shouldn’t have been) and deliberately arranging an overpayment. Is the latter legal? Cause that would be a great way to launder money or avoid taxes, no? I mean, if I have $100k in a 529 and only $30k of expenses I can’t overpay and have them return $70k in cash, right?
^^^
Maybe not with a 529, but from regular after-tax money, I can see a school doing this for a situation that you described…an int’l whose home country makes it difficult to get money out of the country. I guess doing so could be “laundering money” if the money source was questionable…and maybe your college would have been more concerned if the money was from an American? That South African gov’t doesn’t have the long-reach to do anything to your univ.
Truly this is all just 30-year-old hearsay, though the money source would have been legitimate. It’s quite possible it was just a few thousand bucks - but then again, that was the price of tuition so maybe the equivalent of $50K today! But I wonder if that goes on today or whether a college would just want to stay far, far away from helping an international student / family get money out of a home country. Anyone know?