Private School May be Cut in Bankruptcy

Dear Bankruptcy Adviser,My wife and I are considering filing a Chapter 13 bankruptcy. We have two children in private school. Would we still be allowed to continue sending them to private school if we file bankruptcy?

We have an additional complication regarding education costs. Our daughter is about to graduate from high school. We will need student loans to send her to college. Will we be able to obtain loans for her college education?-- Mark

Dear Mark,

These are very tough but important questions to answer. Unfortunately, there is no definitive answer because each bankruptcy district has different opinions about private school expenses. Factors that might come into play are religious beliefs, quality of public schools in the area, how high the tuition costs are and the length of time until a child graduates.

It appears you make a decent living because you are automatically referring to a Chapter 13 bankruptcy. That means you expect to pay back a portion of your debt. A Chapter 13 is known as a reorganization bankruptcy. You will repay some or all of your debts over the next three to five years. Many people file Chapter 13 because their income is too high to file under Chapter 7.

Although I can't give a definitive answer, here are some scenarios that could play out in your case.

The first is what's called a 100% Chapter 13 plan. This is where, under a court-supervised plan, you pay back 100% of your debt to your creditors. It does not matter what you are paying each month, so long as your creditors are being made whole.

The court may not object to your tuition expenses in such a case.

A second scenario is also a 100% plan, but the payment structure is tiered. Under this scenario, the court may not object to the tuition for the one child who is graduating soon. You will likely just have the payment to the court increase after your child graduates, and you redirect what was tuition to your creditors. That could allow you to pay back all your creditors, just in a tiered-payment format.

Then there is the less than 100% plan. This means that, under your Chapter 13 plan, your creditors won't be paid in full. Here is where the court may object to the tuition payment. You will have to prove a valid need to continue paying for private schools. Some arguments you could make might be religious reasons or lack of other adequate public schools in the area.

You should be able to finish paying for your one daughter's tuition, since she's graduating soon. But then you'd have to increase your payment to the court by the amount of her tuition.

However, your younger child could be forced to leave the private school. If he or she just started attending the private school and an adequate public school alternative exists, you might have to send him or her there.

There is some good news, however, about student loans for your college-bound daughter. She will be eligible for government loans since those student loans are need-based and not credit-based. However, getting private loans in your name or as a co-signer might be difficult. I recently discussed this issue in a prior column. Private loans are based on your credit and would be difficult or impossible to receive with bad credit.

While this partially answers your question, more questions remain. Bankruptcy may still be an option, but you need to gather more information before making a final decision.