Back in December 2017, we wrote about Chapter 7 bankruptcy trustees’ attempts to claw back the distribution of Parent Plus loan proceeds to college and universities when the parent that obtained the loan for their child’s education later files for bankruptcy. We explained that such efforts had so far been rejected by bankruptcy courts in Pennsylvania and Michigan. In a pair of recent decisions, the Bankruptcy Court for the District of Connecticut has joined the fray and similarly rejected these claims. If this trend holds, this will be good news for colleges and universities because trustees may no longer feel obligated, as a fiduciary for creditors, to bring such claims in Connecticut and potentially in jurisdictions across the country.
As discussed in our prior article, the Department of Education makes Parent Plus loans to parents to pay for tuition and related costs for their dependents’ attendance at a participating undergraduate institution. The Department of Education pays the loan proceeds directly to the school, and if the student withdraws from school, the unused loan proceeds are paid back to the Department of Education.