On an issue where the lower courts are divided, Bankruptcy Judge Deborah L. Thorne of Chicago ruled that a debt for overpayment of a domestic support obligation is not itself a “domestic support obligation,” or DSO, as defined in Section 101(14A).
The question can arise in several contexts. The issue frequently surfaces in dischargeability litigation, where Section 523(a)(5) renders a DSO nondischargeable. Or, classification as a DSO can determine status as a priority claim under Section 507(a)(1)(A). The case before Judge Thorne involved an overpayment of food stamps and the defense to a preference under Section 547(c)(7).
A DSO is defined in Section 101(14A) as a debt “owed to or recoverable by . . . a spouse, former spouse . . . or a governmental unit” that is “in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) . . . .”
A mother had been receiving food stamps. The state discovered that she had been ineligible for food stamps all along because she had not declared some of her income. The state therefore intercepted a federal tax refund of about $2,000 to apply toward the overpayment.
The woman filed a chapter 7 petition within 90 days of the application of the tax refund against the overpayment and sued Illinois to recover the $2,000 as a preference. The woman and the state filed cross motions for summary judgment. In her Nov. 16 opinion, Judge Thorne ruled in favor of the woman and held that the repayment was a preference.
The state contended that the repayment was not a preference because Section 547(c)(7) preludes a trustee from recovering a transfer that “was a bona fide payment of a debt for a domestic support obligation.” The state argued that the recovery retained the character of the overpaid DSO.
Judge Thorne disagreed, although she conceded that “several cases” have held that the recovery of an overpayment of a DSO itself is a DSO. She found one case where an overpayment of food stamps and two cases where overpayments of child care subsidies were held by bankruptcy courts to give rise to nondischargeable debts owing to governmental units under Section 523(a)(5).
On the other hand, Judge Thorne cited cases where judgments for overpayment of child or spousal support were held not to be DSOs. In one such case, a man, who later discovered he was not the biological father, had obtained a judgment for repayment of child support payments he had made. In that case, the court held that the debt was not a DSO giving rise to a priority claim under Section 507(a)(1)(A). Another case held that a claim by a father for overpayment of child support was not a DSO excepted from discharge under Section 523(a)(5).
Deciding not to follow the one case dealing with food stamps, Judge Thorne instead adopted the approach in the Collier treatise and held that a debt to the government for reimbursement “is not in the nature of support of the debtor’s children.” Rather, the judge said, it was “merely a debt to the government for the return of benefits that should never have been paid . . . and that does not automatically retain any supportive nature that the benefits may have had.”
Judge Thorne therefore granted summary judgment to the woman and declared that the recovery of the overpayment was a preference.
Represented by the Legal Assistance Foundation of Chicago, the woman presumably sued because she could claim the preference recovery as exempt property under Section 522(g) since the transfer was not voluntary.
If there is an appeal, the outcome may turn on whether the appellate court focuses on the definition of a DSO in Section 101(14A) or on the preference defense in Section 547(c)(7). Looking only at the preference defense, the setoff of the tax refund can seem like “a bona fide payment of a debt for a domestic support obligation,” because the woman did have a debt for overpayment of a DSO.
The definition of a DSO, on the other hand, points in the opposite direction because, as Judge Thorne said, the debt does not have the “supportive nature” that characterizes a DSO.
Reversing Judge Thorne would represent dubious social policy. Reversal would have two results.
First, the government could recover from future years’ tax refunds, which likely will have resulted from child-care tax credits intended to supplement the income of low-income individuals raising children. Second, the remainder of the overpayment would become nondischargeable.
Both results together would have the effect of allowing the government to take away food and clothes from the poorest of children. Who could say that’s what Congress intended when the parent was at fault, not the child?