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.