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Can I Pay My Child's Tuition Before I File a Chapter 7 Bankruptcy in Arizona?

By Joseph McDaniel, Esq.

Absolutely!

The real question is, are there consequences to paying that tuition, and if so, what are they?

A tuition payment may be a recoverable asset that is pursued by the trustee in a Chapter 7 case, sometimes.

For instance, if you pay $4,000 tuition for a 25 year old child not living at home, and you file a Chapter 7 Bankruptcy the next day, there is a chance that the trustee will demand a refund of that tuition from the University.

Many University Tuition setups are structured in such a way that the entire tuition payment is refundable for two weeks after classes start, and then 60 per cent is refundable a month after classes start, and then twenty per cent two months after classes start, and then no refunds under any circumstances.

So if a debtor pays tuition after the no-refund drop dead date, the trustee should be unable to retrieve those monies from the University. 

On the other hand, a demand for a refund is only one of the risks associated with such a payment.

It is possible that a trustee could file a complaint objecting that the transfer of the monies on behalf of the family member/insider was in the nature of a fraudulent transfer.

I haven't seen that happen, but I have seen a trustee sue a cat hospital for a refund of an amount paid to ensure future treatments for Fluffy.

So know this: if the Fluffy the Cat Medical Escrow Fund isn't safe, there are no payments that are absolutely bulletproof.

Having said that, if Junior was going to miss a semester of College, and the only way for him to come up with tuition is for mommy to pay it, mommy might want to make sure that Junior painted the entire house, inside and out, in exchange for the dough.

As long as the payment was consistent with the commercially reasonable price for the paint job, that should be a substantially contemporaneous transfer, and not a preference to an insider OR a fraudulent transfer.

Also note: if the payment to Junior is supposed to be payment in exchange for painting the house inside and out, Junior had darn well better have painted the house prior to the filing, you know?

Full post as published by Arizona Bankruptcy Attorney Blog on December 08, 2010 (boomark / email).