A fellow bankruptcy attorney recently asked me this question based on his reading of 11 U.S.C. § 523(a)(7), which provides (with emphasis added):
A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss . . .
Since the obligation to repay a social security overpayment is a debt to a governmental unit, but could be characterized as “compensation for actual pecuniary loss,” the questioner wanted to know if it could be discharged in bankruptcy.
I. Section 523(a)(7) In The Criminal Context
Although it is unlikely that a social security overpayment would lead to a criminal conviction against the debtor, it is worth spending a minute looking at the Supreme Court’s application of § 523(a)(7) in that context.
In Kelly v. Robinson, 479 U.S. 36, 53 (1986) the Court held that a restitutive payment in a criminal case was nondischargeable:
Because criminal proceedings focus on the State’s interests in rehabilitation and punishment, rather than the victim’s desire for compensation, we conclude that restitution orders imposed in such proceedings operate “for the benefit of” the State. Similarly, they are not assessed “for . . . compensation” of the victim. The sentence following a criminal conviction necessarily considers the penal and rehabilitative interests of the State.
In other words, if the Social Security Administration (“SSA”) could establish the debt through a criminal conviction, then the Kelly decision would render the debt nondischargeable under § 523(a)(7).
However, it is unlikely that a debt to repay a social security overpayment would ever be established through a criminal conviction. Therefore, we turn now to the noncriminal context?
II. Is A Debt To The SSA Per Se Exempt From A Bankruptcy Discharge?
The Seventh Circuit Court of Appeals’ decision in Matter of Neavear, 674 F. 2d 1201, 02 (7th Cir. 1982) (emphasis added) proves helpful in answering this question:
In this appeal we are presented with a question of first impression at the federal appellate level: whether section 207 of the Social Security Act, 42 U.S.C. § 407 (1976), confers on the Social Security Administration (“SSA”) 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. We hold that the SSA enjoys no such immunity from the bankruptcy laws and that the overpayment debt is dischargeable under the provisions of the Bankruptcy Reform Act of 1978.
In Rowan v. Morgan, 747 F. 2d 1052, 53 (6th Cir. 1984) (emphasis added), the Sixth Circuit Court of Appeals echoed the Seventh Circuit’s Neavear holding:
The Social Security Administration appeals the Bankruptcy Court’s determination that the Administration’s right to recover an overpayment of benefits was properly discharged in bankruptcy. The Administration argues that its right to recover the benefits is exempted from the operation of the bankruptcy laws by § 207 of the Social Security Act, 42 U.S.C. § 407(a). It also argues it was not properly notified of the bankruptcy proceedings. The judgment is affirmed.
Notice that the focus of these holdings is on § 207 of the Social Security Act, and not on anything in 11 U.S.C. § 523(a). Therefore, at first blush it might appear to be irrelevant to my colleague’s question. However, Neavear and Rowan establish an important principle: debts arising from social security overpayments are not per se nondischargeable. Thus, in the absence of some other factor militating in favor of nondischargeability, a social security overpayment debt should be dischargeable in bankruptcy.
III. Fraudulent Receipt Of Payments Can Be Nondischargeable
One additional factor that can render an obligation to repay a social security overpayment nondischargeable is if the debtor received the overpayment through fraud.
A. The Standard: Clear And Convincing Evidence
Mere allegation of fraud by the SSA is, of course, insufficient. In fact, the standard for establishing fraud is a high one, as the SSA learned in In re Fitzgerald, 73 B.R. 923 (E.D. Pa. 1987):
In this proceeding, we are called upon to determine whether the Government has made out a case that the receipt of an overpayment of Social Security widow’s benefits by the Debtor could be declared nondischargeable, as a debt incurred by false pretenses, a false representation, or fraud, per 11 U.S.C. § 523(a)(2)(A). We find that the Government has fallen short of meeting its burden of proving the elements necessary to succeed in such a Complaint by the requisite “clear and convincing evidence” standard, and we shall therefore grant the Debtor’s Motion to Dismiss, per Bankruptcy Rule (hereafter referred to as “B.R.”) 7041 and Federal Rule of Civil Procedure (hereinafter referred to as “F.R. Civ.P.”) 41(b).
B. The 60-Day Bar Date In § 523(a)(2), (4), And (6) Cases
[A] complaint to determine the dischargeability of a debt under § 523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a).
This means that if any creditor – including the SSA – wishes to challenge the dischargeability of a debt by establishing that the debt was incurred through fraud (§ 523(a)(2)), breach of fiduciary duty (§ 523(a)(4)), or willful and malicious harm to a person or property (§ 523(a)(6)) it must initiate the action by filing the adversary complaint no later than 60 days after the first date set for the § 341(a) meeting of creditors. That’s not much time. I have had cases in which a creditor filed the complaint after the 60-day bar date, and have always won based on Fed. R. Bankr. Proc. § 4007(c).
C. No Bar Date In Other Dischargeability Actions
Time for Commencing Proceeding Other Than Under § 523(c) of the Code. A complaint other than under § 523(c) may be filed at any time. A case may be reopened without payment of an additional filing fee for the purpose of filing a complaint to obtain a determination under this rule.
D. Actions Barred Through The Doctrine Of Laches
Of course, if the creditor waits an absurd amount of time the doctrine of laches will undoubtedly be invoked by the debtor. What is meant by “an absurd amount of time” must be determined on a case-by-case basis, and will depend on the peculiar facts in a given case.
The doctrine of laches bars a cause of action when the plaintiff unreasonably delays in asserting or diligently pursuing the cause and the plaintiff has acquiesced in the act about which the plaintiff complains, or the delay has prejudiced defendant. The defense of laches has nothing to do with the merits of the cause against which it is asserted.
Johnson v. City of Loma Linda, 99 Cal.Rptr.2d 316, 28 (2000) (internal cites omitted).
IV. Section 523(a)(7) Case Law
As you know from my last post, the latest incarnation of the Bankruptcy Code (“BAPCPA”) went into effect on October 17, 2005. All of the cases I quoted above were decided prior to that date. And, as a further disappointment to those of you who practice bankruptcy law in the Ninth Circuit, none of the bankruptcy related cases came from any courts in the Ninth Circuit. Moreover, none of the cases dealt directly with the application of § 523(a)(7) to the dischargeability of social security overpayment debt.
Have I been sloppy? I don’t think so. I simply haven’t found any cases directly on point. I suspect that part of the reason is that it appears that the SSA has never challenged the discharge of an social security overpayment using § 523(a)(7).
Does this mean that the question is still open? I don’t think so. It is true that all the other cases of which I am aware that deal with this question are pre-BAPCPA cases. However, the common thread in their holdings appears to be that since § 523(a) provides a complete list of debts that are nondischargeable in Chapter 7, 11, and 12, and in a Chapter 13 hardship discharge under § 1328(b) and (c), and since there is no mention of social security overpayments in § 523(a), social security overpayments are dischargeable, unless there is something else like fraud involved. A Chapter 13 discharge under § 1328(a) upon plan completion is less restrictive, and makes no reference to § 523(a)(7).
Furthermore, the absence of post-BAPCPA case law on the subject is no more a problem under § 523(a)(7) than the absence of pre-BAPCPA case law is because that subsection was unchanged by BAPCPA. Therefore, since the nonbankruptcy requirement to repay a social security overpayment is arguably not “a fine, penalty, or forfeiture . . .” as specified in § 523(a)(7), in the absence of fraud it should be dischargeable because it is simply a requirement to give back what was incorrectly paid out.
If you are a debtor facing a claim by the SSA regarding a social security overpayment, take to a good bankruptcy attorney to see if it is dischargeable in bankruptcy.