The Tuition “Claw Back” Phenomenon Reasonably Equivalent Value and Parental Tuition Payments

Abstract

A new phenomenon has developed in recent bankruptcy proceedings in which trustees are “clawing back” tuition payments made by debtor-parents on behalf of their children. Relying on Bankruptcy Code section 548, trustees are arguing that because parents have no legal obligation to pay for their child’s college tuition, they receive no “reasonably equivalent value” for such payments, thereby making such transfers fraudulent and eligible for clawback in bankruptcy. These clawbacks are increasingly troubling considering the rising cost of post-secondary education and the burden such expenses can impose on this generation’s college graduates. This Note addresses the confusion in bankruptcy courts over the proper resolution of tuition clawback cases. While some courts have allowed these clawbacks, others have invoked notions of parental and societal obligations to protect debtor parents who make tuition payments on the eve of bankruptcy. This Note explores several solutions to this problem including both amending the Bankruptcy Code and providing for an alternative reading of “reasonably equivalent value.”