Published on:

Social Security Administration Seeks to Recoup Overpayments from California Bankruptcy Debtor’s Post-Petition Benefits

money bagThe federal government is perhaps the most tenacious creditor of them all, and it goes to great lengths to recover money it believes it is owed. This applies not only to taxes but also to benefits, such as the Social Security Disability Insurance (SSDI) program. A bankruptcy court in California, for example, recently considered the government’s claim for recoupment of about $190,000 in SSDI overpayments from a debtor’s future benefit payments. In re Angwin, No. 15-bk-11120, Adv. Proc. No. 15-ap-01080, mem. dec. (E.D. Cal., Apr. 5, 2016).

The Social Security Administration (SSA) administers the SSDI program and other federal benefits programs. The eligibility requirements for SSDI benefits are complicated, and the application process is often quite cumbersome. Once a person is approved to receive benefits, the burden is largely on that person to report any changed circumstances that might cause a reduction in benefits payments. If the SSA determines that it has been overpaying someone, it will assess an overpayment amount. It can withhold benefits payments in their entirety until that amount is satisfied, 20 C.F.R. § 404.502(a)(1), or pursue other means of enforcement.

The automatic stay prevents efforts to collect on a pre-petition SSDI overpayment while a bankruptcy case is pending. An overpayment is also potentially subject to discharge in bankruptcy, unless the SSA can establish an exception. The Angwin court addressed two possible ways for the SSA to assert its claim. The doctrine of setoff applies when a debtor and a creditor owe each other money prior to the bankruptcy case. 11 U.S.C. § 553. It allows the setoff of an amount owed to one party equal to the amount owed to the other party, and it treats that amount as secured debt. Id. at § 506(a)(1).

Setoff did not apply to the parties in Angwin, partly since the SSA was seeking recoupment from future benefits. The court next discussed the equitable doctrine of recoupment, which is not mentioned in the Bankruptcy Code. The Ninth Circuit has limited the availability of recoupment claims to situations in which the demand “arises from the same transaction as the plaintiff’s claim or cause of action.” Angwin, mem. dec. at 7-8, quoting In re Newbery Corp., 95 F.3d 1392, 1399 (9th Cir. 1996).

The debtor in Angwin qualified for SSDI benefits as “the disabled adult child of a person who was receiving SSDI benefits.” Angwin at 2-3. She was reportedly married, making her ineligible for those benefits, for much of the time that she received them. The SSA assessed an overpayment of more than $210,000, which was later reduced to about $190,000 in an administrative proceeding.

The SSA filed an adversary proceeding in the debtor’s bankruptcy case. It asked the court to rule that the overpayment was nondischargeable because of fraud, 11 U.S.C. § 523(a)(2)(A), and to allow recoupment from the debtor’s post-bankruptcy SSDI benefits. The court denied the SSA’s claim. It found that the overpayment resulted from payments to the debtor as the dependent of a beneficiary, while the future payments would be to the debtor as a beneficiary in her own right. They were therefore not “part of the ‘same transaction,’” as required by the recoupment doctrine. Angwin at 17.

Bankruptcy attorney Devin Sawdayi helps individuals and families in the Los Angeles area repair and rebuild their finances through the Chapter 7 and Chapter 13 bankruptcy processes. Contact us online, at (310) 475-9399, or at (800) 474-6050 today to schedule a confidential consultation to see how we can help you.

More Blog Posts:

Tax Penalties Accrued More than Three Years Before Bankruptcy Filing Date Are Dischargeable, Court Rules, Los Angeles Bankruptcy Lawyer Blawg, July 24, 2015

California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse, Los Angeles Bankruptcy Lawyer Blawg, March 11, 2014

How Is Social Security Income Treated in a Chapter 13 Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, June 9, 2013

Photo credit: OpenClipartVectors [Public domain, CC0 1.0], via Pixabay.