Bill Could Stop Bankruptcy Trustees From Suing to Recover Past Student Loan Payments

There is a move in Washington D.C. that could assist San Diego bankruptcy debtors in avoiding excessive litigation in bankruptcy cases involving payment of student loans. The bill, if passed, would make it illegal for bankruptcy trustees to claw back payments made to student loans by students or their parents before filing for bankruptcy.

What is a Claw Back?

Normally, if a bankruptcy debtor files Chapter 7 or Chapter 13 bankruptcy, any payment made by the debtor to any creditor just before the filing can be “clawed back” by the bankruptcy trustee. This means the trustee can sue whoever received the funds to get the money back.

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For example, if a mom is a co-signer on her son’s student loans, and she makes a $10,000 payment to pay off those loans and then shortly afterward files for bankruptcy, a bankruptcy trustee could sue the student loan company or school to get that money back. This hurts the student, who still owes the money, and the parent, who now has to deal with undue litigation in bankruptcy court.

Because bankruptcy trustees are often paid a percentage of what they recover for the debtor’s creditors, they often look for any and all avenues for recovery. Universities, with big pockets, have become the most recent targets.

Student Loan Claw Backs are Becoming More Common

In most cases, trustees will only file claw back lawsuits where the money that has been paid is a larger, more worthwhile sum to pursue. It is believed that at least 25 colleges have been the subject of such suits, being forced to pay back tuition money paid to them.

Still, parents worry that children could be expelled from college if a school has to repay tuition money to a bankruptcy trustee. It is not just universities that can be sued—children who receive the money to pay off student loans can be sued, as well, leaving a parent filing bankruptcy in an adversarial position with their own child.

Many lawmakers find this distasteful. If a new federal law passes, any payments towards student loans before filing bankruptcy would not be able to be clawed back. Many lawmakers believe a parent should have the right to pay a child’s tuition, even if it doesn’t directly benefit the parent or his or her creditors, and that it isn’t right for a parent’s generosity to be punished by having the children sued.

The bill is needed, because in the few cases where bankruptcy courts have ruled on the issue, judges have often determined that the bankruptcy trustee can recover the funds.

Many parents argue that they are getting a benefit for the funds, in the form of education for their children. But most courts have taken the approach that the education doesn’t benefit the parent, it benefits the student. Thus, the courts often feel as if the parent filing bankruptcy essentially “gave away” money that should have gone to the parent’s creditors.
San Diego bankruptcy courts can take a broad look at your financial history to determine whether you get a discharge of debts or not. Let experienced San Diego bankruptcy attorneys evaluate your financial picture, to make sure your bankruptcy is painless. Contact the Bankruptcy Law Center for a free consultation today.