It sounds unthinkable, but this is the newest hot button issue in bankruptcy filings. It stems directly from what is known as a “fraudulent conveyance”. Unlike making a payment to an insider, which has a one (1) year look back period a “fraudulent conveyance” has a six (6) year look back period.
Here is how it works. If you paid for your child to attend college within six (6) years of filing for a Chapter 7 bankruptcy you run the risk of having to pay for that child again. Here is an example:
Mary and Peter Jones paid for their son to attend Notre Dame. He graduate three (3) years ago. The three (3) years following, unfortunately, were hard times for Mr. and Mrs. Jones and now they have to file for bankruptcy. The house is safe, the 401K is safe, the bank accounts are month to month or “rolling”. But at the §341 meeting the trustee asks “Did your son attend college?” Like most parents Mary and Peter are quick to answer “Yes, he graduated three (3) years ago.” The trustee continues “Did you help him with school or did he take out loans?” Proudly, Peter says “It was very tough. I took on an extra job and May cleaned houses, but we managed to pay for my son. He doesn’t have loans.” The trustee says “Okay, I’ll need bank statements from the last six years, tax returns from the last six years and copies of all bills in connection with your son’s education.”
What just happened? Well, simply, the trustee will now figure out hoW much money was paid by Mary and Peter to Notre Dame in the last six (6) years and DEMAND IT BE RETURNED UNDER THE NOTION OF A FRAUDULENT CONVEYANCE.
To make matters worse, the trustee is going directly after the college so the debtors do not have a real voice in the action.
Most colleges when approached enter into a settlement agreement with the trustee. This is done to avoid the cost of litigation. The college will not seek the input of the debtors.
Following the turn-over of the funds the college will typically contact the debtors and advise them that whatever money was expunged by the trustee is now due by the student. You read that right: The parent pays the college, the trustee takes the money back from the college and the college comes after the student.
What is particularly frustrating is that there is no real case law on this issue. It is easier for a college to settle on a lesser amount than to pay for litigation.
So, now the debtors, who were financially strapped to begin with, have the pleasure of informing their children that they may be paying for college after all. Years after they graduated.
At NYBankruptcy.com we are familiar with this issues. Do not enter into a bankruptcy without knowing your rights. You will speak with a duly licensed attorney. We are here to help.