SOCIAL SECURITY AND BANKRUPTCY

CLAIMANT'S AWARD AND BANKRUPTCDY

There is a person for whom I can give advise but generally not take on as a client beyond the office conference and that person is one who comes into the office with a notice from social security indicating that s/he has received an overpayment and social security wants its money back

There are procedures available to try to deal with an overpayment (defined at 20 CFR § 416.537 – note possibility of a surviving spouse being liable for an overpayment received my deceased spouse). A claimant can challenge the existence of or the amount of an overpayment by a timely request for reconsideration. A claimant can request a waiver if: he or she is without fault and the requested adjustment would not defeat the purpose of Title XVI (SSI); that allowing the adjustment would be in good conscience and equity, or the adjustment would impede efficient or effective administration of Title XVI because of the small amount involved.

The test for being without fault is an all factor test, in my experience, weighed in favor of a finding of fault. If the request for waiver of re-payment is denied, a request for reconsideration can be filed. If that is done within 10 days of the denial, benefits can continue. By the way, if you lose on reconsideration and request a hearing, collection on the overpayment can resume from on-going benefits.

A lot more can be said about the foregoing, but that is not the purpose of this blog, this blog deals with the nexus of two areas of the law in which I practice, social security and bankruptcy.

Bankruptcy and Social Security

The big problem with the client who comes into the office with a large overpayment, is that s/he, they, do not have funds either to pay on the overpayment or for attorney’s fees. I have had clients with a large overpayment who could borrow money from friends or relatives to pay the cost of a Chapter 7 bankruptcy (in the appropriate case I see no reason why a fee only Chapter 13 filing would not work). I try to explain the cost of not filing with the cost of filing a bankruptcy.

The reason I bring up the issue of bankruptcy, is that the overpayment can be discharged. There have been numerous court decision and clearly, absent fraud on part of the debtor, Social Security Administration’s claim for overpayment is dischargeable and not protected from operation of the bankruptcy law. The decisions finding that the SSA is not protected, tend to base their decision on 42 USC § 407(a). It provides:

“The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.´(italics added)

The courts have had no trouble construing this to mean that it is in the law to protect ¹ recipients from “losing benefits to creditors, not to protect the federal fisc from bankruptcy of recipients,”² or the SSA from a right of recoupment.

A good example is the case of Lee v. Schweiker, 739 F.2d 870 (3^rd Cir., 1984). In that case the SSA had argued that the language in the law, to-wit “none of the …rights existing under this subchapter shall be subject to…operation of any bankruptcy…law,” provided protection from any modification of the obligations of recipients to repay an overpayment. The Lee court found that the language did not show any intent to protect the SSA, rather it provided protection to the recipient of benefits from creditors, here SSA. It protects recipients from the loss of benefits, by either contract or legal process. The court in dicta, dealing with the issue of recoupment, noted that when dealing with social security overpayment, the courts have held that the benefits that constitute the overpayment were not paid contractually under social security law, and that the obligation to repay an overpayment is a separate debt subject to the ordinary rules of bankruptcy.

As to benefits taken prior to filing bankruptcy, which funds were used to pay on the overpayment, social security was allowed to keep the benefits received by it, because the amounts received did not “improve its position.’(see 11 U.S.C. §523(a)(2)(C))

Social Security is not left without any recourse. If SSA can prove fraud or misrepresentation on the part of the claimant in his/her receipt of benefits, it still has the rights/remedies set forth in 11 U.S.C. § 523(a)(2)(A)—where a finding of false pretenses, a false representation, or actual fraud may preclude discharge.

As with any creditor once SSA receives notice of a bankruptcy filing, social security must cease any collection efforts. The overpayment is a dischargeable debt and absent a finding of fraud, the amount claimant owes to social security will be discharged. When considering whether to file a individual case or a joint case take into consideration that the protection is for the named debtor, i.e. the claimant, and any third parties who have received benefit of the overpayment can still be required to repay.

It would seem that there would be no need for a case construing the same section of the social security act to determine if the bankruptcy trustee could take benefits due to the debtor for the benefit of creditors, but apparently not. In Minnesota the case to read is Carpenter v. Ries, 09-2897 8^th Cir. Court of Appeals, 2010. The Court of Appeals held that “§407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate. See Carpenter II, 408 B.R. at 246-49; see also In re Buren, 725 f. 2d at 1086… We conclude § 407 must be read as an exclusion provision, which automatically and completely excludes social security proceeds from the bankruptcy estate, and not as an exemption provision which must be claimed by debtor.” (The number 3 footnote in the decision tries to reconcile § 407 and 11 U.S.C. § 522(d)(10)(A) – I leave it for your reading).

Assuming the claimant’s mental or physical condition has not improved since s/he was found disabled, upon a filing his/her monthly benefits should resume without deduction.

What about the case in which the attorney has represented a claimant before the Social Security Administration and won, but has yet to receive attorney’s fees?

Bankruptcy and Social Security Attorney's Fees

OMG! I just received notice that my client has filed bankruptcy and listed me as an unsecured, general creditor. Do I lose my fees? This turned out to be a very complicated issue without good answer!

As soon as the bankruptcy notice reaches SSA it will stop processing any process to adjudicate the attorney’s fees. SSA will not proceed during the time the automatic stay is in effect. If I have been listed as an unsecured creditor, SSA will not issue a decision approving or disapproving a fee based upon a fee petition or fee agreement during the stay. What if SSA has approved (certified) the attorney’s fees but not paid them to the attorney, or paid them out to the attorney?

The HALLEX indicates that the fees will be paid or not paid depending on instructions from the bankruptcy court. (I-1-2-3-C.3.) There was an old Program Circular that provided a discharge in bankruptcy stops payment of fees. Are they correct?

A case of interest is Binder & Binder v. Barnhart, 481 F.3d 141 119 Soc. Sec. Rep. Serv. 393 (2^nd Cir. 2007). In Binder, fees had been awarded to Binder under §406 (42 U.S.C. 406 Recognition of representatives; fees for representation before Commissioner). When the claimant filed bankruptcy and listed Binder’s attorney’s fees as an unsecured, non-priority debt, SSA demanded return of the paid fee.

SSA argued that upon claimant/debtor filing bankruptcy, the attorney’s fee debt was discharged. SSA based its argument upon a Program Circular (PC) “OCO 98-050 (the “Program Circular”… entitled “Bankruptcy and Attorneys Fees,” dated March 13, 1998). It provided that where a bankruptcy court discharges all of a claimant’s debts, including the representative’s fee, no fee may be authorized or paid by SSA (Binder @ 144-145). The document upon which the fee recovery was based, the PC, was an internal document and was prepared for use as training material.

The Court in Binder struggled to establish jurisdiction to even hear the matter. It finally decided that “(i)f one conceives of Binder’s claims (both constitutional and statutory) as arising out of property rights created by section 406 of the Act, then there probably is federal jurisdiction…Upon further review…we do indeed have jurisdiction …we now hold that Binder may invoke federal question jurisdiction…because, were such jurisdiction unavailable, it would be unable to obtain any judicial review of its claim under the Act.”@150.

After finding jurisdiction the court addressed the actions of SSA in demanding repayment of the attorney's fees. It held:

“We simply find no authority for the SSA to interpret and apply bankruptcy law or to enforce the orders of the Bankruptcy Court, and we hold that, in the absence of such authority, the SSA's unambiguous and limited duty was to certify for payment to Binder the firm's reasonable fee. The SSA has performed that function, and payment has been made to Binder. Whether Binder is obligated to pay the money to Delnegro by operation of bankruptcy law is a matter that does not properly concern the SSA. If Delnegro seeks to have the $1,200 returned to her, she must take this issue to the Bankruptcy Court, where Binder may again raise his due process, or any other, concerns with that court and may properly file an appeal from any future judgment of the Bankruptcy Court.”

There was no authority for SSA to demand the fees back from Binder. The claimant would have to return to Bankruptcy Court if there was a desire for a return of the funds. The funds would not be available to provide relief to creditors, since the funds are not part of the bankruptcy estate.

Binder & Binder appears to be quite litigious over issues it finds important to its social security practice. The issue of a bankruptcy filing on social security attorney’s fees was again center stage in Binder & Binder, P.C. v. Astrue, 848 F. Supp. 2d 230 (E.D.N.Y. 2012).

Binder had been successful and applied for and had its fee approved. The claimant/debtor filed bankruptcy and received a discharge. SSA advised Binder, pursuant to its “Hearings, Appeals and Litigation Law Manual” (“HALLEX”), that it had received Binder’s petition requesting a fee for the services but that since claimant had filed a bankruptcy petition, the SSA could not act on Binder’s fee petition absent authorization from the bankruptcy court.

We have moved for social security using a PC in 2007 to use of the HALLEX in 2012 to attempt to deny payment of fees for services when tangled with bankruptcy.

The Court indicated that in the Second Circuit, it

“has held that there is “no authority for the SSA to interpret and apply bankruptcy law or to enforce the orders of the Bankruptcy Court, and * * *, in the absence of such authority, the SSA's unambiguous and limited duty [is] to certify for payment to [the representative seeking a fee under 42 U.S.C. § 406] [its] reasonable fee,” Binder II, 481 F.3d at 152 (emphasis added). ⁴ The Second Circuit also held: “The Social Security Act by its terms does not authorize the SSA to enforce discharges in bankruptcy or make any determination as to attorneys' fees other than in accordance with its statutory authority to fix the fees of claimant's attorneys and to withhold and transmit the fees so fixed. The plain language of § 406(a)(4) admits of no exceptions in this regard.” Id. at 151 (emphasis added). According to the Circuit, “the SSA lack[s] *240 authority to deviate from the procedure outlined in § 406(a)(4) of the [Social Security] Act.” Id. at 152 n. 3.

Defendant fulfilled its duty to fix a reasonable fee under Section 406(a)(1) on July 26, 2010, when it determined plaintiff's reasonable fee to be eight thousand dollars ($8,000.00). Defendant's determination that plaintiff was entitled to a fee in the amount of eight thousand dollars ($8,000.00) was proper, notwithstanding the pendency of the bankruptcy proceeding, since it had an “unambiguous” statutory duty to fix a reasonable fee for plaintiff's services under 42 U.S.C. § 406(a)(1). See Binder II, 481 F.3d at 152. In determining plaintiff's reasonable fee, defendant recognized the amount of work completed by plaintiff and determined that plaintiff was entitled to payment for that work in the amount of eight thousand dollars ($8,000.00). See Id. at 151. “Absent a showing that the portion of the total past-due benefits to which [the plaintiff] is entitled is an unreasonable attorneys' fee, * * *, the SSA had a statutory duty under the [Social Security] Act to pay [the plaintiff] the certified fee. ” Id. (emphasis added). Accordingly, since there is no showing that an eight thousand dollar ($8,000.00) fee to plaintiff is unreasonable, defendant had a clear and nondiscretionary duty, with which it failed to comply without authority, to withhold the full amount of certified fees from the past-due benefits award to Landwirth and to pay that amount to plaintiff. “

It appears that SSA is to follow the law as it applies in the social security context completely independent of the rulings of the bankruptcy court. Once the automatic stay is lifted, it should complete is obligation to pay the approved fees. The issue of the propriety of the attorney keeping the earned fee, would need to be addressed, most likely, to the bankruptcy court.³ If SSA pays the fee to the claimant, unless the claimant voluntarily returns the money to the attorney, the attorney may be left without a remedy.

The cases listed in this blog are U.S. District Court decision, a level of determination that SSA may not adopt outside of the holding of the particular cases (Note my prior blog on social security’s non-acquiescence policy)

So this may be an issue bubbling below the surface in several jurisdictions outside of the Second (the Third and Eighth Circuits may bar payment based upon sovereign immunity). This is and will be an issue into the future. The law is not settled. Social Security provides sufficient time between award of benefits and actual payment of fees for a bankruptcy to be filed. The result as can be seen from SSA's own internal regulations, and case law, is unsettled.

There would seem that there is a need to question a prospective client, even if s/he poses a good showing of impairment, to determine the debt situation and if has spoken about bankruptcy, or seen a bankruptcy attorney.

Disclaimer: Blogs posted herein are intended neither as legal advice, nor do they create nor attempt to create an attorney-client relationship. The person viewing my blogs is admonished that an attorney-client relationship may only be created with the express consent to the parties to it. This blog is only the opinion of the author and are not expressed authority on any of the subjects discussed

1This appeal presents two technical issues of bankruptcy law. The first involves the extent to which the doctrine of recoupment allows the Social Security Administration (“SSA”) to continue recovering a pre-bankruptcy overpayment from the benefit checks of a debtor after she has filed a Chapter 13 petition, in spite of the automatic stay created by 11 U.S.C. Sec. 362. The second involves the application of the limitation on setoffs contained in 11 U.S.C. Sec. 553(b), known as the “improvement in position test,” to the situation in which the SSA agrees to recover an overpayment by means of monthly deductions from a beneficiary’s benefit checks, rather than by means of legal process. We are also confronted with the question of whether section 207 of the Social Security Act, 42 U.S.C. Sec. 407, renders SSA immune from the limitations placed on creditors by the Bankruptcy Code.” Lee v. Schweiker, 739 F.2d 870 (3^rd Cir., 1984)

2Lee v. Schweiker, supra @874

3“Does this exclude social security proceeds from the recipient's bankruptcy estate altogether?  In the bankruptcy context, at the commencement of a case, §544 of the Bankruptcy Code “authorizes a trustee to, in effect, capture property of the estate by exercising, as relevant here, all powers of a judgment creditor which obtains an execution that is returned unsatisfied.” Nothing in that section, §541, or §522, or any other provision of the Bankruptcy Code, makes express reference to §407 of the Social Security Act, or in any way trumps its provisions. The BAP held that since no provision in the Bankruptcy Code makes express reference to §407, and, without such express reference, that statute renders social security benefits, paid or payable, free from the operation of any bankruptcy law, a bankruptcy trustee has no authority to administer, as property of the bankruptcy estate, moneys paid to a debtor as social security benefits. “In other words, such proceeds are not property of the bankruptcy estate.”” Carpenter v. Ries (In re Carpenter), 408 B.R. 244 (8th Cir.BAP (Minn.))