Debt to DHS Not Domestic Support Obligation

Posted by NCBRC - November 29, 2017

A payment on a debt to the DHS based on an overpayment of food stamp benefits does not fall under the preferential transfer exception for domestic support obligations simply because the overpayment was made under a program for the support of the debtor’s children. Halbert v. Dimas (In re Halbert), No. 16-13005, Adv. Proc. No. 16-479 (Bankr. N.D. Ill. Nov. 16, 2017).

The DHS overpaid funds to the debtor, Tyeane Halbert, under its Supplemental Nutrition Assistance Program (“SNAP”). Within ninety days of Ms. Halbert’s bankruptcy petition, the DHS intercepted her tax refund to offset the debt based on the overpayment. Ms. Halbert sought to recover the refund under section 522(h) on the grounds that the transfer was a preference under section 547(b). The DHS argued that the payment fell under section 547(c)(7)’s exception to preferences for “domestic support obligations,” pointing to the definition of that term in section 101(14A)(ii) as a debt owed to a governmental unit which is “in the nature of . . . support.”

The court began its analysis with a look at Wisconsin Dep’t of Workforce Dev. v. Ratliff (In re Ratliff), 390 B.R. 607 (E.D. Wis. 2008), where that court found a debt based on overpayment of food stamp benefits was excepted from discharge under section 523(a) as a domestic support obligation. The court in Ratliff, and courts reaching similar holdings, based its conclusion on a finding of causal connection between the purpose of the original payment for support and the debt that arose out of the overpayment.

Cases finding the other way, such as In re Vanhook, 426 B.R. 296, 301 (Bankr. N.D. Ill. 2010), hold that the debt arising out of an overpayment (or wrongful payment), generally has a different character than the original purpose of the payment. While the original payment was intended for support, the debt arose out of a separate obligation arising out of the excess payment amount and does not serve any purpose related to domestic support. As the court in In re Lutzke, 223 B.R. 552, 554 (Bankr. D. Or. 1998), pointed out, any payment on the debt based on overpayment is not intended for the domestic support of the creditor. [The court noted, however, that where one spouse with a child-support obligation overpays to the other spouse sharing child-support, the overpayment debt could be considered to retain the “nature of support” in that it could go to the creditor spouse’s actual child support obligations.]

The court noted that most debts owed to a governmental unit would be the result of an overpayment of support in one form or another and, therefore, finding that the ensuing debt retains the nature of support would apply too broadly. Rather, the court reasoned, the type of domestic support obligations owed to a governmental unit that would be covered by the definition in section 101(14A)(ii) would more appropriately be the type of debt where the support obligation is assigned to the government, or where the payment is owed to the government in situations of “foster care, wardship or residential treatment centers.”

The court thus concluded that the transfer was preferential under section 547(b) and did not fall under the exception set forth in section 547(c) and granted summary judgment in favor of Ms. Halbert.

Halbert Bankr ND Ill opinion Nov 2017

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