When Americans file for bankruptcy, they relinquish their assets to a trustee who decides how best to divide them among creditors. Trustees also examine past expenditures, looking for fraud, so that unscrupulous people can’t hide their assets by transferring money, homes, cars, or luxury items to someone else for safekeeping.
Reasonable people wouldn’t consider a child’s college education a luxury item, or a cunning means by which to avoid paying a debt. But some aggressive bankruptcy trustees call it an unnecessary expense, and are coercing schools to return tens of thousands of dollars to pay off an insolvent parent’s debts.
The practice punishes two innocent parties: students and schools. It’s absurd, and it invites legislative action.
In legal terms, “clawback” is the recovery of money that already has been disbursed, as when companies seek to recover bonuses from employees who are later found to have broken the law. In bankruptcy cases, trustees have argued that college tuition qualifies for clawback, because a parent’s obligation to support a child ends at age 18. (Legally, that is. Ethically is a whole other story.)
The Wall Street Journal reported recently that New York’s Pace University relinquished more than $23,000 to a bankruptcy trustee. As college costs skyrocket, some trustees may think themselves pin-striped Robin Hoods, but they look more like thugs pursuing a mob debt.
Thankfully, some voices of reason have emerged from bankruptcy courts that denied tuition recovery. In a 2013 case, a judge dismissed the idea that college tuition is an expense on par with a Swiss bank account, affirming the societal expectation “that parents will assist with such expense if they are able to do so.”
Still, the Journal report suggests that tuition clawback is morphing into a trend. If so, Congress should change the federal bankruptcy code to shield from recovery any tuition spent on a child.
The Corvette and the mink remain fair game.