A district judge in Chicago disagreed with the Third Circuit by ruling that the withholding of Social Security benefits to recover an overpayment is recoupment and therefore exempt from the automatic stay in Section 362.
Recoupment permits netting out claims that arise from the same transaction. Unlike setoff where pre-petition obligations cannot be netted out against post-petition debts, recoupment makes no such distinction, so it does not violate the automatic stay.
In Lee v. Schweiker, the Third Circuit held in 1984 that withholding current Social Security benefits to recover prior overpayments did not qualify as recoupment and thus violated the automatic stay. To distinguish cases permitting recoupment to recover overpayments to health care providers, the Philadelphia-based appeals court held that Social Security payments do not arise from a contract but from a governmental obligation to provide benefits. Recoupment did not apply, the Third Circuit said, because recovering a debt for overpayment was separate from an obligation to pay benefits.
District Judge Sharon Johnson Coleman disagreed in her Dec. 13 opinion. Her disagreement resulted in part from a significant factual difference with Lee.
In the case before Judge Coleman, a woman had been criminally convicted of defrauding the Social Security Administration by using a false identity to collect benefits to which she was not entitled. She was also ordered to pay $37,000 in criminal restitution.
She filed a bankruptcy petition after the government began collecting the restitution judgment by cutting off her Social Security benefits, which had been her only source of income. The bankruptcy court ruled that enforcement of the restitution judgment did not violate the automatic stay.
Judge Coleman disagreed with the Third Circuit when she said that “the obligation to repay a prior overpayment is [not] separate from the right to receive benefits.” She said that an adjustment of benefits “to recover prior overpayments constitutes an integral part of the statutory process for calculating the Social Security benefits owed.”
Consequently, Judge Coleman held that there was no violation of the automatic stay because the payment of current benefits and withholding to recover prior overpayments are “elements of one unified transaction subject to recoupment.”
Judge Coleman also distinguished Lee because the Third Circuit case did not involve criminal restitution, merely overpayment. She read the Social Security Act as distinguishing between overpayments resulting from fault and those not involving fault. When there is no fault, the government has discretion to suspend recovery of overpayments.
In her case, Judge Coleman said the debtor was at fault. As shown by the governing statute and regulations under the Social Security Act that preclude paying benefits until an overpayment is recovered, she said that Congress did not intend for the payment of current benefits in a case like the one before her.