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SSA Setoff of Prepetition Benefits Upheld

A bankruptcy court correctly calculated the amount of an overpayment the Social Security Administration could recover from a debtor’s prepetition benefits, the Seventh Circuit recently held in Berg v. SSA, No. 17-2389, 2018 U.S. App. LEXIS 22980 (7th Cir. Aug. 17, 2018). The debtor received benefits that were subject to the SSA’s setoff claims days before her bankruptcy case was filed. However, not all amounts withheld were subject to avoidance. The bankruptcy court correctly decided that only benefits withheld that had accrued and to which the debtor was entitled within the 90-day preference period were recoverable by the debtor.

The debtor began to receive disability benefits in 1994 and continued to receive benefits even after returning to work. The SSA determined that it had overpaid the debtor, and the debtor was ordered to reimburse the SSA at a specified monthly rate. The debtor again stopped working in November 2012 and filed a new application for disability benefits in March 2014. The SSA determined that the debtor was entitled to disability benefits from November 2012, but under applicable SSA regulations, the debtor’s benefits began to accrue in May 2013.

In early August 2014, the SSA sent a benefits check to the debtor. The check was payment of the debtor’s accrued benefits from May 2013 through July 2014 minus the balance of the earlier overpayment. A few days later, the debtor filed her bankruptcy case and sought to recover the entire setoff as a preference.

The bankruptcy court noted that the debtor could recover benefits withheld by the SSA to the extent that the amounts withheld improved the SSA’s position as a creditor during the 90-day preference period. The debtor argued that the SSA improved its position by the entire amount of the setoff because the benefits against which the setoff was made were received by her within the 90-day preference period.

However, the debtor’s disability benefits began to accrue beginning in May 2013, and the debtor had a right to monthly disability benefits from May 2013 through July 2014. To calculate the amount by which the setoff improved the SSA’s position, the bankruptcy court calculated the difference between the amount by which the SSA’s claim against the debtor for the previous overpayment exceeded the benefits owed to the debtor 90 days prior to filing and the date of the setoff.

Ninety days prior to filing, the debtor was owed disability benefits of $17,385 and owed the SSA $19,400 for the previous overpayment. Consequently, 90 days prior to filing, the SSA’s claim against the debtor exceeded the debtor’s benefits by $2,015. On the date of the setoff, the SSA’s claim against the debtor was still $19,400 but the amount owed to the debtor was $20,307. The amount by which the SSA’s claim exceeded the benefits owed to the debtor was zero on the date of the setoff. The difference between the amount by which the SSA’s claim against the debtor for the previous overpayment exceeded the benefits owed to the debtor 90 days prior to filing ($2,015) and the date of the setoff ($0) was $2,015. Therefore, the SSA improved its position by $2,015 during the preference period, and this was the amount the debtor was able to recover from the SSA.