What Do You Do When a Family Files for Bankruptcy?
Vol. 16 No. 1
The following scenario was recently shared in our Business Manager e-list, a free, email-based, position-specific resource for private-independent school community members.
“A student is enrolled for the 2017–18 school year but has a small outstanding balance on their 2016–17 tuition account. The parents promised to pay it over the summer but, before making the payment, filed for bankruptcy and named the school as a creditor. What do we do?”
Many Business Managers shared their thoughts and advice, but every situation is different. Your state laws, the type of bankruptcy the family declares, whether or not loans are involved, and many other factors can impact how to approach this problem if it occurs in your school.
However, some Business Managers offered preemptive advice—tips that can be implemented now and may help if one of your families declares bankruptcy in the future. Consider the following recommendations to see if any make sense for your school.
Recommendation #1: Include protective language. One recommendation is to include language in your tuition payment plan that makes tuition non-dischargeable in bankruptcy. Non-dischargeable means it cannot be eliminated if a family declares bankruptcy. You can work with your school’s attorney to ensure the correct language is included and it makes sense for your school.
Recommendation #2: Consider your payment policies. A Director of Finance and Operations shared the following anecdote. “We had a FORMER family whose business filed bankruptcy. Since the dad paid tuition with company checks, and the payment of tuition was not a typical business expense, we ended up having to pay the bankruptcy trustee back for the tuition paid with the company's funds. Our attorney cut a deal and we only had to pay about 10% back, but it was a huge hit that we weren't prepared for.” This shows how a seemingly innocent practice—accepting business checks for tuition—can have unintended consequences. Think through your policies and ensure you’re not opening yourself to unnecessary liability.
Recommendation #3: Know your rights. If one of your families declares bankruptcy and is unable to pay tuition, it can be easy to react. You may be tempted to hold on to the student’s transcripts or not allow them to participate in school activities until tuition is paid. However, in these situations, it’s always best to consult with your legal team. Laws and regulations vary from state to state—you want to ensure you do what’s best for your school and students.
It’s our hope that your school never encounters this situation. But, if you do, it’s best to be prepared, understand your rights, and work with professionals to produce the best outcome.
Additional ISM Resources:
The Source for Business and Operations Vol. 14 No. 6 Providing Financial Information to Parents
Additional ISM resources for Gold Consortium members:
I&P Vol. 41 No. 14 Private-Independent Schools and Personal Financial Information
I&P Vol. 37 No. 5 Strategic Financial Planning and Your School’s Budget: Companion Documents