Unlike overpayments of Medicaid, which are subject to recoupment, the discharge injunction (sometimes?) prevents the government from recovering overpayments of Social Security benefits from debtors.

Chief Bankruptcy Judge Bruce A. Harwood of Concord, N.H., decided that the government was attempting to effect a setoff to recover overpayments of Social Security benefits, and setoffs are barred by the discharge injunction in Section 524.

In the 1990s and 2000s, the debtor had received disability benefits from the Social Security Administration, or SSA, Judge Harwood said in his May 7 opinion. In 2010, the SSA notified the debtor that she had improperly received almost $43,000 in disability benefits between the years 2007 and 2010 because she had been working.

In 2022, the debtor applied for disability benefits once again. The SSA notified her that she would be paid about $1,200 a month. However, the notice also told her that she must refund about $41,000 within 30 days. Rather than refund, the debtor filed a chapter 7 petition, scheduled the $41,000 debt and received a general discharge.

The government filed but withdrew with prejudice a complaint seeking to bar discharge of the debt as one obtained by false representations under Section 523(a)(2)(A).

Before the debtor received her general discharge, the SSA notified her that it would withhold $400 a month from her new disability benefits toward recovery of the overpayment. After discharge, the SSA began deducting the $400 monthly.

The debtor reopened her case and filed an adversary proceeding seeking a declaration that the SSA had violated the discharge injunction.

The SSA filed a motion for judgement on the pleadings, taking the position that the withholdings were recoupment that didn’t offend the discharge injunction. Naturally, the debtor claimed that the withholdings were a setoff precluded by discharge.

Unlike setoff, which is permissible under Section 553 with regard to debts and credits that both arose before filing, Judge Harwood said that the “Bankruptcy Code does not expressly recognize recoupment; instead, it is a common law doctrine preserved through judicial decisions.”

Judge Harwood cited the First Circuit for holding “that recoupment constitutes an equitable exception to the Bankruptcy Code’s prohibition against offsetting reciprocal debts.” To differentiate between setoff and recoupment, he again cited the First Circuit for holding that “courts should employ the ‘same transaction test’ to determine whether a creditor’s actions, in recovering an overpayment to a debtor by reducing postpetition payments due a debtor, constitute recoupment instead of a setoff.”

Judge Harwood said he was “thus faced with the question of whether the SSA’s actions . . . by reducing her monthly [disability] benefits . . . by $400.00 . . . arise out of the same transaction or instead from different transactions.”

Citing statutes, the government took the position “that the Social Security Act provides a continuous relationship between the SSA and individuals who hold Social Security numbers, from the time a person receives his or her Social Security number until the person’s death.”

The debtor countered by saying “there is no logical relationship between the SSA’s overpayment of benefits to her between 2007 and 2010, which relate to her previous claims of disability, and her current entitlement to SSDI benefits, which relate to her new claim of disability filed in 2021.”

Again citing the First Circuit, Judge Harwood said his task was to “determine whether the SSDI statutory scheme provides for a ‘single, ongoing, and integrated transaction.’” See Holyoke Nursing Home Inc. v. Health Care Fin. Admin. (In re Holyoke Nursing Home Inc.), 372 F.3d 1, 4 (1st Cir. 2004).

Judge Harwood explained how the First Circuit in Holyoke decided that recovery of Medicaid overpayments was recoupment because “the Medicare statute . . . provides for recovery of past overpayments as part of the calculation of presently due amounts.” Specifically, he quoted Holyoke for saying that the Medicaid statute allows for “‘necessary adjustments on account of previously made overpayments and underpayments.’”

Judge Harwood said that provisions in the Social Security Act “do not, on the other hand, define the SSA’s liability for [disability] benefits to include ‘necessary adjustments’ for previous overpayments or underpayments.” Instead, he said the Social Security law provides several alternatives for recovery of overpayment.

Of perhaps greater significance, Judge Harwood said that the “Debtor’s disability claims arose from different sets of facts: those in the 1990s and 2000s, and those in 2021 and 2022.”

Judge Harwood denied the SSA’s motion to dismiss, holding that “the SSA’s reduction of the Debtor’s monthly [disability] benefits is not a recoupment, but rather a setoff,” because “there is not ‘one, ongoing, integrated transaction’ between the SSA and the Debtor.”

Observation

Is recovery of overpayments of Social Security benefits always a setoff? Could it be recoupment if there were no interregnum between the payments of benefits and if the payments were all made based on the same application?

Retirement

Judge Harwood will retire on August 11. The First Circuit has selected his replacement.

Judge Harwood is only retiring from the bench. One year from now, he will be the President of ABI.