Under section 548 of title 11 of the United States Code (the “Bankruptcy Code”), a trustee may avoid a transfer by a debtor that was an actual or constructive fraud. An actual fraudulent transfer is a transfer made with actual intent to hinder, delay, or defraud creditors. In general, a constructive fraudulent transfer is a transfer or the incurrence of an obligation by a debtor that was made within two years before the date of filing the bankruptcy petition, for less than reasonably equivalent value, at a time when the debtor was insolvent and could not pay its debts and obligations as they became due.
In the context of tuition payments made by a debtor for the benefit of a third party (e.g., their children), the courts appear to be divided on whether such payments may be avoided as fraudulent transfers. This memorandum discusses whether debtor parents receive reasonably equivalent value in exchange for tuition payments thus, making them unavoidable as fraudulent transfers. Part I analyzes how case law interprets indirect value received in exchange for a debtor’s transfers. Part II examines how case law interprets intangible value received in exchange for a debtor’s transfers. Part III addresses the current split in case law regarding whether a trustee for a debtor parent may avoid college tuition payments made on behalf of the debtor’s children, as fraudulent transfers.