Overpaying a DSO Doesn’t Result in a Nondischargeable Debt, Seventh Circuit Holds

The Seventh Circuit narrowly interpreted “domestic support obligation” in direct appeals from rulings by two bankruptcy judges in Chicago. Some might say the appeals court ignored the plain meaning of Section 101(14A), defining a domestic support obligation, or DSO.

Others would say the Seventh Circuit employed good judgment to achieve a result that Congress likely intended and did not abandon common sense by relying only on the terse language of a statute.

The Cases in Bankruptcy Court

The cases before Bankruptcy Judges Deborah Thorne and A. Benjamin Goldgar were similar but not identical. In one, the chapter 13 debtor had received an $8,000 overpayment of child care tuition by the state. In the other, the chapter 7 debtor had received an overpayment of $3,400 for food stamps for herself and her two children.

In both cases, the state filed claims and contended that the overpayments were nondischargeable DSOs. Section 101(14A) defines a DSO 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) . . . .”

The state contended that the overpayments fit neatly within the definition because the benefits given by the state were designed to help the women support their children. If the obligations to repay the overpayments were DSOs themselves, the debts would be nondischargeable under Section 523(a)(5).

Judges Thorne and Goldgar concluded that the debts arising from the overpayments were not DSOs and were therefore dischargeable. When the state appealed, both bankruptcy judges certified direct appeals to the circuit. The circuit accepted the direct appeals, since courts around the country disagree on the outcome. To read ABI’s report on Judge Thorne’s decision, click here.

In her June 27 opinion for the appeals court, Chief Circuit Judge Diane P. Wood upheld the bankruptcy courts, saying that the result sought by the state “would expand the definition of domestic support obligation far beyond what is intended by the bankruptcy code.”

Judge Wood favorably cited a 2010 decision by another Illinois bankruptcy judge involving a man who won a judgment for the repayment of child support because it turned out that he was not the father. The bankruptcy court held that the repayment obligation was not a DSO because erroneously charging the man for support obligations did not transform the refund obligation into a DSO.

Judge Wood said that the debtors did not owe “money for support obligations.” Rather, she said they owed a debt because “they received money they were not statutorily entitled to.”

Since the payment obligations by the debtors were “not in the nature of alimony, maintenance or support, we agree with the bankruptcy court decision that this is merely an overpayment of benefits and not a domestic support obligation,” she said.