Tuition Recovery Lawsuits and Your Bankruptcy – What You Need to Know

Oct 6, 2015 | Bankruptcy, Chapter 7 Bankruptcy, Student Loans

I’ll bet you thought kicking in for your son’s tuition was tough. College is important – we all know that. But does it really have to be that expensive? And did little Johnny really have to pick that private, four-year liberal arts college. State school is good enough (and cheap enough) right?

Well, you could have told him “no,” but you didn’t. So you were stuck “supplementing” his student loans with about 10 grand per year of your own money. I hope he ended up with a great degree and an excellent job, because you’re on your way to the poor house and probably bankruptcy court. And the hits just keep on coming, because something unexpected could happen to those old tuition payments when you file.

According to the Wall Street Journal, there is a new and growing trend out there. It’s the tuition recovery lawsuit.

“You mean, I get to go to school and then sue to recover the tuition I paid? It’s a win win!”

Well, not quite.

A tuition recovery lawsuit occurs when you file for bankruptcy, and the bankruptcy trustee sues the school for the tuition that was paid while your child attended the school.

“Can they do that? It seems so wrong.”

Well, yes – apparently they can.

There have been several successful lawsuits with the same set of facts. In each case, a bankruptcy trustee was able to force a school to pay back the tuition a parent had paid for a child when the parent subsequently filed for bankruptcy.

“But how can they do that? What’s the rationale?”

The typical argument goes as follows:

1. You had a lot of your own debt
2. You chose to pay for your child’s tuition when you could have been paying back your own creditors
3. Now you are broke
4. The trustee is going to force the school to pay him the money you paid for your child’s tuition. He will then take the money and pay the creditors that you should have paid in the first place

“So how does that affect me when I file for bankruptcy?”

Lucky for you, it usually doesn’t. It’s really a problem for the college to deal with. But you should keep it in mind if you are contemplating filing for bankruptcy, especially if your child is still in school. You don’t want to cause any problems for little Johnny, at least before he graduates.

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