Month: July 2015

Social Security Benefits Held in Bank Accounts are Exempt

Social Security Benefits Held in Bank Accounts are Exempt from Creditors and Bankruptcy Estate

In Finberg vs. Sullivan, 634 F.2d 50 (3rd Cir. 1980), the Court of Appeals for the Third Circuit held,  “The money in these accounts was entirely exempt from attachment and garnishment. The Social Security Act provides an exemption for moneys paid as benefits. 42 U.S.C. § 407 (1976). See Philpott v. Essex County Welfare Board, 409 U.S. 413, 93 S.Ct. 590, 34 L.Ed.2d 608 (1973) (exemption protects benefits held in checking and savings accounts).”

SSA Cannot Offset Social Security Benefits to Recoup Overpayment Debt Discharged in Bankruptcy

SSA Cannot Offset Social Security Benefits to Recoup Overpayment Debt Discharged in Bankruptcy

When the Social Security Administration discovers that it has overpaid benefits, it is required to offset future benefits to recoup the overpayment. An interesting question is whether this situation is in the nature of a debt, which would mean that it is dischargeable in bankruptcy, or whether the reduction is simply part of the definition of future benefits.

The Court of Appeals for the Seventh Circuit answered this question in In re Neavear, 674 F.2d 1201 (7th Cir. 1982). The 2013 opinion of the United States Bankruptcy Court for the Southern District of Illinois in Zimmerman vs. Social Security Administration (In re Zimmerman), Case No. 11-41386, Adversary No. 12-4076, describes the Neavear decision as follows:

In that case, the debtor received disability benefits for approximately eleven years without informing SSA that during the latter three years, he was self employed as a real estate broker. When he later became disabled and entitled to receive benefits again, SSA commenced a proceeding to offset the earlier payments (that were improperly received) against Neavear’s future benefits. An administrative law judge found that Neavear had been overpaid $19,818.10 in disability benefits, and that his future benefits must be reduced in satisfaction of the overpayment debt. The debtor subsequently filed a chapter 7 bankruptcy proceeding, listing on his schedule of debts a $19,818.10 overpayment debt owed to SSA. After receiving a discharge, SSA continued to reduce his disability benefits in an attempt to recover the debt. Neavear filed a complaint in the bankruptcy court seeking a declaration that the overpayment debt had been discharged.

The issue in Neavear was “whether § 207 of the Social Security Act, 42 U.S.C. § 407 (1976), confers on the Social Security Administration … a blanket exemption from the operation of the bankruptcy laws, so that a debt owing to the SSA because of an overpayment of benefits cannot be discharged in bankruptcy.” Id. The court held that “SSA enjoys no such immunity from the bankruptcy laws and that the overpayment debt is dischargeable….” Id.

The Court of Appeals for the Third Circuit addressed the issue in Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984). It held:

We conclude that, in spite of statutory or contractual provisions providing for “recoupment” of previous overpayments, the primary purpose of these [social-welfare] statutes is to provide income security to the recipients. Once a bankruptcy petition is filed, the income provided by Social Security benefits should be protected by the automatic stay. The right of SSA to recover pre-petition debts should be subject to the limitations on setoff, just as it is limited by the provisions for exemption and discharge, In re Neavear, 674 F.2d 1201 (7th Cir. 1982), rather than treated as part of a “contract” between the government and the debtor. Accordingly, we hold that SSA may not recoup previous overpayments from benefits payable after a bankruptcy petition is filed.

Based on these authorities, it appears that the Social Security Administration cannot offset post-petition social security benefits to recoup pre-petition overpayments.

An obvious exception to this rule would exist when the debtor does not receive a discharge or when the Social Security Administration files and prevails in an adversary proceeding under 11 U.S.C. Section 523(a) to determine that the overpayment resulted from the debtor’s fraud.

Another exception, or more accurately distinguishable situation, was identified in the Zimmerman opinion cited above. There, the debtor had received a lump-sum workers compensation settlement pre-petition. The Social Security Act requires the Social Security Administration to allocate a lump-sum workers compensation benefit across a longer period of time and to reduce future social security benefits until that time elapses. The Social Security Administration continued that reduction after the debtor filed bankruptcy, and the debtor sued for violations of the automatic stay and discharge injunction. The court, granting summary judgment for the Social Security Administration, acknowledged that any pre-petition obligation to the SSA was discharged but held that the reduction was part of the formula defining future benefits and was not affected by the discharge.

Chapter 7 Debtor Cannot Strip Underwater Second Homestead Mortgage

Chapter 7 Debtor Cannot Strip Underwater Second Homestead Mortgage

On June 1, 2015, the United States Supreme Court delivered its decision in Bank of America, N.A. vs. Caulkett . The decision was unanimous. The Court held that a chapter 7 debtor cannot utilize Section 506(d) of the U.S. Bankruptcy Code to avoid (“strip”) a second mortgage from his homestead even when the value of the homestead is less than the balance of the first mortgage, i.e., when the second mortgage is, in the vernacular, “entirely underwater”. The Court stated that Section 1322(b)(2) of the Bankruptcy Code might allow a different result in a chapter 13 case.

Chapter 13 and Divorce: When Does Automatic Stay Terminate as to Property Division

Chapter 13 Bankruptcy and Divorce: When Does Automatic Stay Terminate as to Property Division

Most chapter 13 bankruptcy plans last five years. That is time for major changes to happen in a debtor’s personal life, including divorce. The pendency of a chapter 13 case interferes with filing and maintaining a divorce case. In that situation, some debtors dismiss their chapter 13 cases, and some file motions to terminate the bankruptcy interference. Others choose to wait until the interference terminates towards the end of the bankruptcy case. For those debtors, it is important to know exactly when the interference, in the form of the “automatic stay”, ends. Answering that question requires the examination and coordination of many authorities.

Automatic Stay. 11 U.S.C. Section 362(a) provides: “Except as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title [a bankruptcy petition] operates as a stay, applicable to all entities”. This section prohibits acts against the debtor, against the property (assets) of the debtor, and against property (assets) of the bankruptcy estate.

An order of a divorce court awarding possession or ownership of property involved in the bankruptcy, or a petition or motion requesting such an order, would be within the purview of Section 362(a).

Property. Property for bankruptcy purposes includes (1) all property owned by the debtor when he filed bankruptcy, (2) certain inheritances and other property acquired by the debtor due to a death occurring within 180 days after he filed his bankruptcy (11 U.S.C. Section 541(a)(5), all property that the debtor acquires before his chapter 13 case is closed (11 U.S.C. Section 1306(a)(1), and (3) debtor’s personal services earnings during his chapter 13 case. A few other things are included as assets in special situations that are not discussed here, for example conversion of cases from one chapter to another.

Assets are either “property of the estate” (meaning the bankruptcy estate) or “property of the debtor”.

Property of the Debtor. Property of the debtor includes (1) assets that are “exempt”, such as household furnishings, clothing, some vehicles, etc., (there are many categories of exempt assets), (2) assets that have been “abandoned” (which is explained below), even if they were once property of the estate, and (3) once the bankruptcy court enters an order of discharge (which wipes out debts), all assets, even if they were property of the estate. The last of these items is demonstrated in detail below.

Property of the Estate. Property of the estate is all property (as defined above) that is not property of the debtor.

Abandonment. Abandonment is the event of property of the bankruptcy estate reverting to being property of the debtor. An asset is abandoned when (1) a creditor (usually a mortgagee needing to foreclose or a vehicle lienholder needing to repossess) has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U.S.C. Section 554(b), (2) the trustee assigned to the bankruptcy case has filed a motion and the bankruptcy court has entered an order abandoning the asset (often a business or high-maintenance asset that is burdensome) (11 U.S.C. Section 554(a), (3) the debtor has listed the asset in the schedules filed in his bankruptcy and the bankruptcy case has been closed (11  U.S.C. Section 554(c)), (4) the debtor or his spouse, wanting to act against the asset in a divorce case before the bankruptcy law normally allows it, has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U .S.C. Section 554(b).

Termination of the Automatic Stay. Termination of the automatic stay occurs automatically in some special situations, e.g. when a chapter 7 debtor delays reaffirming a secured debt and when a previous chapter 13 case of a chapter 13 debtor has been dismissed too recently.

More commonly, termination of the automatic stay occurs when a party files a motion and the court enters an order granting relief from the automatic stay regarding an asset. Such a motion is normally utilized by a creditor to allow mortgage foreclosure or vehicle repossession. However, if a debtor or his spouse cannot wait to proceed with divorce until the automatic stay terminates automatically, one of them can file a motion for relief from the automatic stay in the bankruptcy court in order to obtain permission for a divorce court to award possession or ownership of assets.

Termination of the Automatic as to Property of the Debtor. As to property of the debtor (as opposed to property of the estate – see the definition above), the automatic stay terminates automatically when the court enters the discharge order (the order wiping out debt), even if the case has not yet been closed. 11 U.S.C. Section 362(c) provides,  “(1) [T]he stay of an act against property of the estate continues until such property is no longer property of the estate; (2) the stay of any other act under [Section 362(a)] continues until the earliest of – . . . (C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, or 13 of this title, the time a discharge is granted or denied”.  An act against property of the debtor, as stated earlier, is an act under Section 362(a), and it is an act that is other than an act against property of the estate. Therefore, the automatic stay as to acts against property of the debtor terminates upon the entry of discharge.

Termination of the Automatic Stay as to Property of the Estate. As to property of the estate (as opposed to property of the debtor), it is more complicated to determine when the automatic stay terminates automatically. It is necessary to examine several authorities and to tie them together.

11 U.S.C. Section 362(c)(1) provides that “the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate”. This means that the stay terminates as to property of the estate when the property ceases to be property of the estate.

11 U.S.C. Section 1327(b) states, “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of the plan vests all the property of the estate in the debtor”.

The standard plan confirmation order in a Northern District of Oklahoma chapter 13 case (other districts are beyond the scope of this memorandum) provides that property of the estate does not vest in the debtor until discharge is entered:  “Notwithstanding confirmation of the Plan, all property of the estate defined by 11 U.S.C. Section 1306 shall remain property of the estate and shall not revest in the Debtor until a discharge is entered or the case is dismissed.”

11 U.S.C. Section 1306(b) states, “Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” My belief is that the drafters of the standard confirmation order probably intended to refer to Section 1327(b) instead of Section 1306, but, whether or not that is true, it is clear that the order means that the debtors do not recover ownership of property of the estate until the discharge is entered.

When all of these provisions are connected, it becomes apparent when it is that the automatic stay terminates regarding property of the estate.  The automatic stay terminates as to property of the estate when it ceases being property of the estate. It ceases being property of the estate when it vests in the debtor. It revests in the debtor when the discharge is entered in a chapter 13 case. Therefore, the automatic stay terminates as to property of the estate when the discharge is entered in a chapter 13 case.

Conclusion. As demonstrated, the automatic stay terminates both as to property of the debtor and as to property of the estate when the discharge is entered in a chapter 13 case. Therefore, when the discharge is entered in a chapter 13 case, the automatic stay ceases to prohibit a divorce court from entering, or a party from filing a motion or petition requesting, an order awarding possession or ownership of any assets of the bankruptcy debtor.