Consumers’ lawyers, take note: The Seventh and Third Circuits agree that an award of accrued Social Security benefits accrues each month, not in one lump sum when the award is paid.
The distinction makes a difference when a consumer debtor exercises rights under Section 522(h) to recover a setoff under Section 553(b).
In the case at bar, the debtor owed the Social Security Administration about $20,000 for an overpayment of benefits. Later, the SSA agreed that she was entitled to disability benefits. The debtor was due to receive about $19,000 when the disability award came due for payment a few months later.
Effecting a right of setoff, the SSA paid her about $1,000 when the time came for payment of the accrued disability benefits. A few days later, she filed bankruptcy.
The trustee did not pursue a claim against the SSA because a recovery would be an exempt asset going to the debtor. So, the debtor exercised her rights under Section 522(h) to sue the SSA to recover the setoff. She claimed the entire setoff was recoverable under Section 553(b) because the government had improved its position by that amount, on the theory that she had not accrued any benefits until they were actually paid.
Chief Bankruptcy Judge Catherine J. Furay of Madison, Wis., disagreed and held that the accrued benefits were accruing month by month, even though they were not payable until later. Judge Furay ruled that the debtor was only entitled to recover the setoff in the amount of about $2,000, because that was how much the SSA had improved its position in the 90 days before bankruptcy.
On direct appeal, the Seventh Circuit agreed with Judge Furay, in an opinion on August 17 by Circuit Judge Ilana D. Rovner.
“In plain English – a commodity rarely found in the Bankruptcy Code,” Judge Rovner explained that Section 553(b) means that a creditor may recover “an amount set off by the creditor in the ninety days preceding the filing of the bankruptcy petition but only to the extent that the creditor improved its position during the ninety-day period.”
Judge Rovner interpreted the Social Security Act to mean that someone’s benefits accrue every month, not in one lump sum when accrued benefits are ultimately paid. In that regard, she agreed with the Third Circuit’s conclusion in Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984).
The notion that benefits accrue every month, Judge Rovner said, “is consistent with the Bankruptcy Code’s concepts of ‘debt’ and ‘claim’ as they are used in Section 553(b)(2).” Since a claim includes an unmatured claim, she concluded that the right to benefits accrued when there was a right to benefits, not when the benefits were paid.
Judge Rovner also saw “no basis in policy to conclude otherwise,” because “Section 553 does not bar setoffs entirely but simply prevents a creditor from improving its position during the ninety-day period.”