The short answer to this is “yes,” a Social Security overpayment is treated like any other unsecured debt.    There are exceptions to the dischargeability of a particular debt under Section 523 of the Bankruptcy Code and exceptions to the discharge as a whole under Section 727 of the Code.

Specifically, this means, however, that fraudulent behavior can result in a finding that this Social Security debt is not dischargeable.

Overpayment issues typically arise in disability cases when a claimant continues to accept and receive disability payments even after returning to work.  The question then becomes – “did the debtor/claimant knowingly and with intent to deceive the Social Security Administration continue to accept disability payments even when not entitled to do so?”

A 2009 case decided by Judge Joyce Bihary, chief judge of the Bankruptcy Court for the Northern District of Georgia offers helpful insight into how a bankruptcy judge will analyze this issue.

In the Rodriquez vs. United States of America case, debtor Diego Rodriquez collected over $70,000 of disability benefits after returning to work.   Mr.  Rodriquez filed Chapter 7, then asked the Bankruptcy Court to rule on his request for waiver of overpayment.  Judge Bihary found that the Bankruptcy Court did not have jurisdiction over this issue and denied Mr. Rodriquez’ motion about the waiver issue, but she took the unusual step of addressing some of the substantive issues arising from the overpayment problem.

In what is known as “dicta,” the judge explained that under her understanding of the law, “an overpayment debt of Social Security benefits is dischargeable”  and will be treated like any other unsecured debt.   The judge cited a 1982 7th Circuit case called Neavear v. Schweiker as support for her conclusion.  Since Social Security did not file a timely objection to discharge, the overpayment debt owed by Mr. Rodriquez is dischargeable.

What is interesting to me about this decision are the judge’s discussion of the facts.  Apparently, on several occasions, Mr. Rodriquez attempted to advise Social Security about his return to work, but all of these disclosures were ignored by SSA.  Further, the judge noted that Social Security had put Mr. Rodriquez in limbo by failing to respond to his request for administrative review.

The judge devotes almost a page of her decision to suggestions about how SSA might appropriately satisfy its statutory obligations to Mr. Rodriquez.   Reading between the lines, it seems apparent to me that the judge found Mr. Rodriquez’ testimony credible about his efforts to report his employment income to Social Security, but she did not believe Social Security’s assertions (apparently gleaned from documentation and perhaps testimony) that it had not received notice of employment from Mr. Rodriquez.

The judge references Social Security’s ineptitude regarding file management.  Mr. Rodriquez’ deliquentcy grew so large because “SSA lost debtor’s file for a period of five years.”

In my mind, the obvious question in an overpayment case is this – how can a debtor not be guilty of fraudulent behavior if he accepts Social Security payments while at the same time he is working and earning money.  Wearing my Social Security disability lawyer hat I can tell you that Social Security’s rules about trial work periods, its Ticket to Work program and its extended period of disability and work that does not reach the level of “substantial activity” is by no means intuitive and even a sophisticated claimant would not necessarily know when he might be allowed to keep his disability check as well as his paycheck.

The judge in the Rodriquez case did not reach this issue (because Social Security did not raise it) but I get the sense that the judge felt that in this case at least, the debtor tried to play by the rules but received little cooperation from Social Security and that Social Security’s “unclean hands” might very well be held against the agency in a dischargeability inquiry.

So, what can we learn from the Rodriquez case?  I think that if you are attempting to discharge an overpayment you will need to show that you tried to engage Social Security to resolve the issue prior to filing bankruptcy.   If you were confused by Social Security’s rules it would not be a bad idea to explain your areas of confusion in your correspondence with Social Security.   Finally I would make sure that you and your lawyer identify specific addresses where notice of your bankruptcy filing ought to go.  Social Security is such a bloated bureaucracy that they will most likely not file an objection in time – there is no need to give them added life by not offering notice at the correct address.

He was unhappy to learn that Section 523(a)(9) of the Bankruptcy Code specifically excepts from discharge debts arising from the “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.”

I read this Code section to mean that my client cannot discharge:

• any damage award due to the accident victim
• restitution ordered by the local county court
• fines imposed by the local county court

What about property damage arising from this drunk driving accident.  I read the Code section to limit non-dischargeability to personal injury so I do not think that property damages would be excepted here.

Washington D.C. bankruptcy lawyer Morgan Fisher wrote a post about DUI damages and bankruptcy dischargeability last year.  He notes that an insurance company seeking subrogation damages (recovery of car repair payments from the negligent driver by an insurance company) could argue against dischargeability under other provisions of Section 523.   I believe that Morgan is referring to Bankruptcy Code Section 523(a)(6) which excepts from discharge debts arising from the “willful and malicious injury by the debtor to another entity or to the property of another entity.”

Morgan also notes that a local Bankruptcy Judge will look to the state law in the jurisdiction where the criminal prosecution is based to determine culpability.   I suspect this means that if you are convicted of DUI in a state where the applicable blood alcohol limit is .08, but you file bankruptcy in a state where the limit is .10, you would not be able to argue that Section 523(a)(9) does not apply to you.

I would also suggest that any DUI defendant who is contemplating a plea should look carefully at the language of 523(a)(9) – how the plea is structured in state court could have a bearing on whether the debt was dischargeable.  I have not seen this happen, but I would think that a Bankruptcy Judge might have to hold an evidentiary hearing if the state court DUI plea bargain did not conclusively speak to driving under the influence.

Secondly, I would respectfully suggest that it is never too late to begin the process of tackling your financial issues.   Over the years I have met with many potential clients in January and February who bring me credit card bills containing charges incurred for presents in November and December.  They are ready to make a fresh start and want to file.

On more than one occasion I heard the explanation “well, I knew that I was going to have to file bankruptcy at some point – but I wanted my family to enjoy a nice Christmas first.”

From my perspective as a bankruptcy lawyer, this attitude will get you in trouble.  Common sense should tell you that you cannot run up your credit cards buying gifts, then wipe out that debt a month or two later by filing bankruptcy.

Not surprisingly the Bankruptcy Code addresses the issue of “credit card binge” debt as well.

Section 523(a)(2) excepts from discharge debt that was obtained if an individual made material and false representations about his financial condition (i.e. , lies on the credit application).

Section 523(a)(2)(C) provides that:

1. consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services (luxury goods defined as goods or services reasonably not necessary for the support or maintenance of the debtor or a dependent of the debtor) incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and
   
2. cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable;
   

Section 523(a)(2)(a) excepts from discharge money, property or services incurred by false pretenses, a false representation, or actual fraud (i.e. incurring debt that you knew or should have known that you would not be able to repay)

As you may suspect, the bankruptcy law provides that credit card lenders can challenge your discharge in certain circumstances.   You cannot, for example, go to an electronics superstore, buy a flat panel television and a $10,000 stereo system using your credit card, then file a bankruptcy the next week to wipe out the debt.

The Bankruptcy Code speaks to two situations in which credit card debt to a specific credit card lender can be declared non-dischargeable:

Recently incurred credit card debts

Bankruptcy Code Section  523(a)(2)(c) provides that the following debts are presumed non-dischargeable:

(I) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable

Credit Card Debts Incurred by Fraud or with No Realistic Expectation to Repay

Bankruptcy Code Section 523(a)(2)(b) allows a creditor to challenge the discharge of the following types of debts:

(A) [debts incurred by] false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

Many people use credit cards as a means of survival.  Frequently, therefore, I see clients who desperately need to file bankruptcy but have used credit cards recently.  Not surprisingly, recent credit card use prior to bankruptcy is a problem – but just how big of a problem is it?

I recently received this question from a reader of my blog:

Hello, I had a question about chapter 7 bankruptcy. If I incur a lot of debt on my credit cards (like $30,000 worth) four or five months before declaring bankruptcy (for business expenses), could this be considered Bankruptcy Fraud?  In Massachusetts, the lookback period for credit cards is 90 days, but can it be extended further?

Here is my answer:  Bankruptcy Code Section 523 addresses this situation.  Section 523(a)(2) provides that:

consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

• his household income is below the median – so we do not have to deal with the means test
• his house is modest – valued at around $120,000 with mortgage debt equal to or above the value.  He is also prepared to surrender his house
• he has $70,000 in credit card bills – all fairly old
• he has $1,000 of medical debt

What, then, is the problem?

In February and March, my potential client  transferred the balance on several of his credit cards to new cards with lower interest rates.  Now, instead of having a lot of old debt, he has brand new debt in the form of what amounts to a cash advance.

Section 523 of the Bankruptcy Code says that cash advances totaling more than $750 within the 70 days prior to filing are presumed non-dischargeable.  (Jonathan notes that several astute readers emailed me to correct my error regarding the presumption of non-dischargeability for cash advances.   Cash advances in the weeks prior to filing bankruptcy are still not a good idea )  The transferee card issuer could object on the grounds that when the balances were transferred, my potential client knew or should have known that he was insolvent and that he would not be able to pay back these new debts.

My advice – start making minimum payments.  Do so for at least 6 months, or a year, if possible.  Even then, there is some risk, but after a year of making payments he would have a "good faith paper trail."

The lesson here – if you find yourself in significant debt, think very carefully about making any significant financial moves.  Seek professional counsel.  Several times a month, I meet with people for a bankruptcy consultation and we end up deciding that bankruptcy is not the right move right now.  More importantly, I advise these folks what not to do and how to avoid making a bad situation worse.  Quite frankly, these type of clients get real value out of their consultations and I encourage anyone who thinks that there is a 1% chance of bankruptcy to spend an hour with a bankruptcy lawyer.

Technorati Tags: chapter 7 bankruptcy, balance transfers, cash advances, Section 523, objections to dischargeability of debt

April – cash advance of about 4-6gs’
May – cash advance of about $500
July – filed Bk 13 end of July
Aug – Ch13 341 Meeting
* Trustee objected to my “good-faith,” payback of $250 a month *
The Median Test proved I was not in presumption of abuse and I had negative -$60 disposable income, Schedule I and J proved I had $800
October – Objection to confirmation goes Easter District, state of Virginia Judge
* Judge did not want say yay or nea and wanted me to re-submit another plan, Judge mentioned I was not forced to work 2 jobs, I could quit one and convert to Ch13, or I could resubmit a new plan * It only made sense for me to quit one job than have to payback $800 bucks for the next 5 years *
Oct – I quit one job, converted to Ch7
Nov – Ch7 341 meeting
Now I’m just waiting to discharge (hopefully by January) last day for creditor objections Jan 8, 2007

At the time I was in Ch13, I didn’t hear of any objections from creditors or even a peep about my recent cash advances from April-May. (due to being a gambler) I thought it my Bk would be a big issue. Not a peep about that either. Now that I’ve converted to Ch7 and another 60 day to objection starts over. My concern is what are the chances of objection/adversary’s coming up from creditors. My thoughts are this, I haven’t paid any of them since June/July its been IF you count from MAY until now (DEC) about 6-7 months since my last cash advance (I think its like 180 days one should wait if they’ve had heavy spending on their credit cards – and since mine were cash advances due to gambling – I would think it would be a big issue!)

What are your thoughts?

Thanks, Mickey aka Catchmeifyoucan

Jonathan Ginsberg responds:  Mickey, thanks for the kind words.  To answer your question….my experience has been that most credit card lenders will not object to dischargeability if the total debt owed to that particular creditor is $15,000 or less.  I suspect that the cost of retaining counsel and pursuing smaller claims is too high.  I also think that the more time between your use of the cards, the better.  Here, you have a fairly large cash advance in April, but you do have a good faith payment in May, then a Chapter 13.  You did not say how large your total balances are to any particular lender.

Under the old law, debts that were not dischargeable in a 7 would be dischargeable in a 13.  That has now changed but I have not seen much of a change by the credit card lenders.  Here, because your loans were most likely coded as a Chapter 13, you may slip through the cracks.  This is even more likely if your case was filed in a busy filing district.

If the bankruptcy specialist at the credit card company wakes up, he would see that his company does have leverage to push you into some sort of a payback settlement.  However, if you have not heard anything by now, you may be under the radar.

Technorati Tags: recent credit card use and bankruptcy, dischargeability action, credit card advance, Section 523(a), Chapter 7 discharge

UPDATE: Attorney Susan Gant recently emailed to update me that Judge Bonapfel has issued his order awarding debtor’s counsel Howard Rothbloom over $3,000 in attorney’s fees pursuant to Bankruptcy Rule 9011. Because creditor’s counsel failed to respond to the debtor’s discovery motions or his motion for summary judgment, the Bankruptcy Code requires that the Court impose sanctions against the creditor (MBNA) and its local counsel.