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Will Tuition Clawbacks in Bankruptcy Be a Thing of the Past?

On Tuesday, Rep. Chris Collins (R., N.Y.) introduced a bill that would bar bankruptcy trustees from attempting to claw back tuition money from universities, and under some circumstances, from college students – a legal strategy that arises in some parents’ bankruptcy cases.

Currently, when a parent files for bankruptcy after they have paid their children’s college tuition, they may be subjected to scrutiny from the bankruptcy trustee who argues that the money should have been spent on their debts, not on college tuition.

With his bill, Rep. Collins contends that parents have the right to prioritize a child’s education over paying other debts such as credit card debt or medical debts – both of which are unsecured.

Collins said that deciding on what bills to pay and which ones not to pay is a personal decision. He said that families all over America are tightening their belts when tuition comes due because it’s the future of their kids.

Rep. Blake Farenthold (R. Texas) is another signer of the bill, which is otherwise known as the Protecting All College Tuition Act of 2015.

The Wall Street Journal conducted a search of public filings and found that at least 25 colleges have been asked by bankruptcy trustees to return money in recent years, and over a dozen have complied.

Essentially, when people file for bankruptcy, their past financial conduct can be examined by bankruptcy trustees, whose duty it is to recover as much money as they can to repay creditors.

Since parents who paid college tuition didn’t receive the value of that expenditure – their child did – that gray area has allowed trustees to recover those funds from schools.

Under Rep. Collins' bill, tuition payments specifically would be excluded from the list of financial transfers that could be clawed back.

Rep. Collins, who has two children of his own enrolled in undergraduate and law school programs right now, he said that some things just hit you as wrong.

Rep. Collins was elected in November of 2012; he introduced another bankruptcy-related bill called the Protecting Gun Owners in Bankruptcy Act of 2015. This bill would allow financially struggling gun owners to keep their firearms, instead of having to sell them at the trustee’s request.

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