Circuit Court Addresses “Insufficiency” Calculation for Purposes of Set-Off

Posted by NCBRC - August 23, 2018

In calculating set-off under section 553, the bankruptcy court properly used the amount of the back-award accrued from the date of the debtor’s eligibility even though the debtor was not entitled to receipt of those benefits until within 90 days of filing her bankruptcy petition. Berg v. Social Security Admin., 900 F.3d 864 (7th Cir. 2018).

For a time, and through no fault of her own, Peggy Berg received social security benefits after she was no longer eligible. When the SSA caught its error, Ms. Berg began repaying the overpayment. She reapplied for social security benefits in March, 2014, and she was awarded benefits as of May, 2013. She did not receive her Notice of Award, however, until July 30, 2014. The Notice informed Ms. Berg that the SSA would set-off the almost $20,000 representing her remaining debt from the back-award it owed her. On August 7, 2014, Ms. Berg filed a bankruptcy petition and an adversary complaint seeking to reverse the set-off under sections 553(b) and 522(h). The bankruptcy court found that approximately $2,000 was improperly withheld by the SSA. The Seventh Circuit granted Ms. Berg’s petition for direct appeal.

A debtor is empowered to recover a set-off under section 553(b) if the set-off caused the creditor to improve its position between the position it was in 90 days before the bankruptcy filing and the position it was in at the time of the set-off. Section 553(b) provides that “the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency . . . 90 days before the date of the filing of the petition.” “Insufficiency” means the amount the debtor’s debt exceeds what the debtor is owed.

Ms. Berg argued that because on May 9, 2014, (90 days prior to her bankruptcy petition) she had not yet received the Notice of Award from the SSA, there were no accrued benefits against which to set-off her debt. Therefore, 90 days prior to her bankruptcy the insufficiency was her entire debt of $19,400. In contrast, Ms. Berg argued, at the time the SSA took the set-off, in July, 2014, there was no insufficiency at all because the SSA now owed her more than she owed it. Therefore, under the text of section 553(b)(1), Ms. Berg argued that she was entitled to return of the entire set-off.

The Seventh Circuit disagreed. The court reasoned that section 423(a)(1) of the Social Security Act provides that social security benefits accrue monthly whether the entitled recipient actually receives those benefits or not. Therefore, the court found that the SSA’s debt to Ms. Berg began to accrue as of the date of her entitlement to those benefits in May, 2013, even though she did not receive her Notice of Award until July, 2014. Therefore, the SSA owed Ms. Berg $17,385 ninety days prior to her bankruptcy petition for an insufficiency of $2,015 and, because at the time the SSA took the set-off in July, 2014, it owed Ms. Berg more than she owed it, the SSA improved its position in that amount.

The circuit court, therefore, affirmed the decision of the bankruptcy court.

Berg 7th Cir. Aug 2018

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