Recently, there is a dispute between bankruptcy trustees and colleges over the application of the clawback provision of the Bankruptcy Code on college tuition paid by insolvent parents for the benefits of their children within several years of filing for bankruptcy. The Bankruptcy code allows the bankruptcy trustee to recover transfer of assets or money prior to filing bankruptcy where the insolvent parent did not receive “reasonably equivalent value” for the transfer. The parents did not receive benefit from the college tuition–it’s their children.
The Bankruptcy Code allows for the recovery of fraudulent transfer within 2 years from the date of filing bankruptcy. However, California Uniform Fraudulent Transfer Act allows for a longer period of 4 years, providing greater protection for unsecured creditors.
In a recent pending case in Sacramento Bankruptcy Court, a Chapter 7 Bankruptcy Trustee is suing a university for return of over $178,000 of tuition paid by the parents for their children’s education within 4 years from the date of filing their bankruptcy.
In response, many federal lawmakers are proposing bills banning claw back recovery of tuition in bankruptcy.