Add another wrinkle to the worries of consumers thinking about filing for bankruptcy — in New England parents of college age children may find their bankruptcy trustees going after money paid for their children to attend college.
On November 12, 2019 the First Circuit Court of Appeals in Boston ruled that tuition payments made to a child over the age of majority within two years before the bankruptcy filing constitutes a fraudulent transfer, and that a college or university may have to retroactively cough up the payments to the bankruptcy trustee.
The ruling came in the Palladino bankruptcy case, where the debtors had made several of thousands of dollars in tuition payments to Sacred Heart University in Connecticut, where their adult daughter was attending college for a bachelor degree.
The First Circuit’s opinion becomes binding law in Massachusetts and New Hampshire, as well as Rhode Island, Maine and Puerto Rico. The opinion is not in force elsewhere, although it may be influential with bankruptcy judges nationwide. The opinion was written by Chief Judge Jeff Howard, formerly a lawyer and politician in New Hampshire.
The Palladino ruling reversed a bankruptcy court order issued by Massachusetts bankruptcy judge Melvin Hoffman which had said Saced Heart could keep the payments.
The appeals court however explicitly rejected the arguments of the school and the parents that tuition payments are legitimate because they help a child become financially independent in the long term, by virtue of earning a valuable degree.
Instead, the First Circuit essentially found that even laudable motives for paying for a child’s college expenses are irrelevant; so long as payments were made by parents when they were insolvent (typical with consumers who later file for bankruptcy), they are fair game for a bankruptcy trustee to go after.
There are still many questions left open after the ruling however. The appellate court did not address how their ruling would apply in states that have higher ages of majority, in situations where their are custody or divorce orders that compel a parent tuition payments, or what actions (such as denying to provide transcripts) a school might take if they lose their tuition revenue in litigation.