Because I handle both personal bankruptcy cases and Social Security disability cases, I frequently get questions about the interrelationship between these two areas of law. A question I get at least once a month has to do with whether a Social Security disability overpayment is dischargeable in bankruptcy.
The short answer to this is "yes," a Social Security overpayment is treated like any other unsecured debt. There are exceptions to the dischargeability of a particular debt under Section 523 of the Bankruptcy Code and exceptions to the discharge as a whole under Section 727 of the Code.
Specifically, this means, however, that fraudulent behavior can result in a finding that this Social Security debt is not dischargeable.
Overpayment issues typically arise in disability cases when a claimant continues to accept and receive disability payments even after returning to work. The question then becomes – "did the debtor/claimant knowingly and with intent to deceive the Social Security Administration continue to accept disability payments even when not entitled to do so?"
A 2009 case decided by Judge Joyce Bihary, chief judge of the Bankruptcy Court for the Northern District of Georgia offers helpful insight into how a bankruptcy judge will analyze this issue.
In the Rodriquez vs. United States of America case, debtor Diego Rodriquez collected over $70,000 of disability benefits after returning to work. Mr. Rodriquez filed Chapter 7, then asked the Bankruptcy Court to rule on his request for waiver of overpayment. Judge Bihary found that the Bankruptcy Court did not have jurisdiction over this issue and denied Mr. Rodriquez' motion about the waiver issue, but she took the unusual step of addressing some of the substantive issues arising from the overpayment problem.
In what is known as "dicta," the judge explained that under her understanding of the law, "an overpayment debt of Social Security benefits is dischargeable" and will be treated like any other unsecured debt. The judge cited a 1982 7th Circuit case called Neavear v. Schweiker as support for her conclusion. Since Social Security did not file a timely objection to discharge, the overpayment debt owed by Mr. Rodriquez is dischargeable.
What is interesting to me about this decision are the judge's discussion of the facts. Apparently, on several occasions, Mr. Rodriquez attempted to advise Social Security about his return to work, but all of these disclosures were ignored by SSA. Further, the judge noted that Social Security had put Mr. Rodriquez in limbo by failing to respond to his request for administrative review.
The judge devotes almost a page of her decision to suggestions about how SSA might appropriately satisfy its statutory obligations to Mr. Rodriquez. Reading between the lines, it seems apparent to me that the judge found Mr. Rodriquez' testimony credible about his efforts to report his employment income to Social Security, but she did not believe Social Security's assertions (apparently gleaned from documentation and perhaps testimony) that it had not received notice of employment from Mr. Rodriquez.
The judge references Social Security's ineptitude regarding file management. Mr. Rodriquez' deliquentcy grew so large because "SSA lost debtor's file for a period of five years."
In my mind, the obvious question in an overpayment case is this – how can a debtor not be guilty of fraudulent behavior if he accepts Social Security payments while at the same time he is working and earning money. Wearing my Social Security disability lawyer hat I can tell you that Social Security's rules about trial work periods, its Ticket to Work program and its extended period of disability and work that does not reach the level of "substantial activity" is by no means intuitive and even a sophisticated claimant would not necessarily know when he might be allowed to keep his disability check as well as his paycheck.
The judge in the Rodriquez case did not reach this issue (because Social Security did not raise it) but I get the sense that the judge felt that in this case at least, the debtor tried to play by the rules but received little cooperation from Social Security and that Social Security's "unclean hands" might very well be held against the agency in a dischargeability inquiry.
So, what can we learn from the Rodriquez case? I think that if you are attempting to discharge an overpayment you will need to show that you tried to engage Social Security to resolve the issue prior to filing bankruptcy. If you were confused by Social Security's rules it would not be a bad idea to explain your areas of confusion in your correspondence with Social Security. Finally I would make sure that you and your lawyer identify specific addresses where notice of your bankruptcy filing ought to go. Social Security is such a bloated bureaucracy that they will most likely not file an objection in time – there is no need to give them added life by not offering notice at the correct address.
A study recently published by the web site Find Law indicates that a considerable percentage of the U.S. population (one in eight survey respondents, or nearly 13 percent) has either considered filing for bankruptcy or actually done so.
That figure may seem high, but in a nation of consumer debt, depreciating home values and a limited job market, perhaps it’s no wonder that so many of us are in need of serious the serious financial protection and debt relief that bankruptcy can offer.
Who Is Considering Bankruptcy?
The study breaks down potential bankruptcy filers in part by age:
Americans between 35 and 54 are reportedly the group most likely to consider bankruptcy as an option.
Americans 18 – 34 and 55 and older are, according to sources, half as likely as the middle age group to consider or actually file for bankruptcy.
Senior citizens (those 65 and older) are apparently the least likely group to consider bankruptcy as a debt relief option, at only seven percent.
How Have Bankruptcy Filing Numbers Changed in Recent Years?
Sources indicate that in 2010, 1.5 million Americans actually filed for bankruptcy protection. This number marks the highest annual total since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the standards for those interested in bankruptcy protection.
Why Do So Many People Need Bankruptcy Protection?
While no two bankruptcy cases are alike, bankruptcy filers often note common triggers that led them to seek the protection of the bankruptcy court. These include:
Unexpected medical expenses: Illness and injury can both cause serious medical bills to build up, particularly for those people who are uninsured or underinsured. And even an otherwise happy event, like the birth of a child, can prove very expensive.
Change in family makeup: Divorce and death are difficult to deal with on their own, but are often compounded by the financial troubles they cause. Many families are forced to face unpleasant financial realities after divorce or death carries off a primary breadwinner.
Job loss or reduction: Even good employees are at risk of losing their jobs in the current economic climate, and even though layoffs have slowed in recent months, the unemployment rate remains high. It’s no secret that this type of financial burden can lead a household to seek bankruptcy protection.
Fear of foreclosure: Even those with good health and steady jobs may find themselves unable to keep up with their mortgage, and some families opt to file for bankruptcy in hopes of fending off mortgage foreclosure.
Considering the many factors that can contribute to a household’s decision to file for bankruptcy protection, it may be a wonder that only one in eight Americans has thought about personal bankruptcy!
Steve Carell is saying farewell to "The Office" tonight. This means saying goodbye to one of our favorite characters on TV: Michael Scott, the energetically awkward boss of Dunder Mifflin's Scranton branch whose love for his employees is only outmatched by his lunacy.
In one of our favorite moments from the show, Micahel is, like so many other Americans, besieged by credit card debt. After weighing his options he decides that declaring bankruptcy is the best one. Except, instead of hiring a bankruptcy lawyer he, in typical Michael Scott fashion, took his own route:
The National Foundation for Credit Counseling reported results from its annual survey of consumer financial literacy recently, and the findings suggest that, as a nation, we’re still not as well equipped to deal with financial stumbling blocks as we need to be.
Specifically, the survey revealed the following about American consumers:
26 percent of survey respondents reported spending more than they did last year, a percentage higher than it has been for two years. While this could be good for the nation’s economic recovery, it’s only one part of the puzzle.
More than 40 percent of respondents graded themselves as earning a C or lower in their personal finance know-how. This is alarming but not surprising: in more official tests of financial literacy (often given to high school students), it’s often common for the majority of students to fail.
While more than two-thirds of Americans reported paying for most purchases with cash or debit cards, 40 percent still reportedly carry revolving debt on their credit cards from month to month. This sort of behavior can be dangerous and debilitating, especially if a consumer is hit with unexpected job loss or income reduction. In fact, one of the most commonly cited factors for bankruptcy filings is overextension on credit.
More than 80 percent of the those polled apparently voiced the opinion that walking away from a mortgage can be justified in certain circumstances, particularly if the borrower was misled at the time of the loan or if the borrower can no longer afford mortgage payments. If many people get a chance to act on these beliefs, the effect on the housing market could be seriously detrimental, especially during a period of recovery.
Why Does Financial Literacy Matter?
The issue of financial literacy education has been a hot one in recent years, ever since the bubble in the housing market burst and the abuses (by lenders and borrowers alike) came to light.
Since the beginning of the Great Recession, we’ve seen legislation like the Credit CARD Act to improve the transparency of credit products for consumers, the creation of the Consumer Financial Protection Bureau, and proposals to change debit card fees and other consumer credit products.
When the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in 2005, one of its provisions was the introduction of a Debtor Education (also called a Financial Management) course for all bankruptcy filers – the idea was that those who filed for bankruptcy could certainly benefit from a little guidance on financial matters. And the idea seems to be a good one.
But what about those who aren’t ready to file for bankruptcy? Luckily, the U.S. Government has set up a financial literacy destination, MyMoney.gov, for people who have never set foot in the bankruptcy court.
The Associated Press reports that former baseball star Lenny "Nails" Dykstra has been charged with bankruptcy fraud by a California based United States Attorney. Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.
In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property. Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.
Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor. However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra.
When you list assets on your bankruptcy petition, you are swearing that this list is accurate under penalty of perjury. If your trustee discovers that items have been omitted, or worse, that they have been secretly sold, the trustee will refer the case to the U.S. Attorney for prosecution.
Sometimes, I overhear conversations in bankruptcy court in which a debtor expresses frustration with the bankruptcy process or anger at an ex-wife, a former business partner or even a former employer. I also hear conversations expressing frustration with the rather stingy dollar limits set out in the Georgia exemption statute. I sense that some bankruptcy filers believe that the circumstances that led to their having to file were unfair and out of their control and as such leaving out inherited jewelry that "no one will ever know about" or selling a few items for cash can be rationalized.
While it is probably true that Chapter 7 trustees generally do not have the resources to thoroughly investigate every Chapter 7 debtor, I caution any bankruptcy filer not to take the risk.
First and foremost, an intentional failure to disclose assets is illegal and constitutes a crime under federal law. No asset is worth your freedom or personal integrity.
Second, you have no way of knowing if the United States trustee will select your case for a random review which can also mean much more intrusive scrutiny.
Third, it is possible that a third party – often an ex-wife or ex-business partner – might anonymously write the U.S. Trustee to report intentional errors on your petition.
Fourth, you might fall victim to "Murphy's law" – your trustee or someone from his office might see you walk into a pawn shop or might see your auction on eBay. Believe it or not, these types of coincidences do happen.
Often, issues associated with assets that you cannot protect can be resolved if you do not have to file right away. While the bankruptcy laws can be unforgiving, they will not punish you if you sell assets to raise money for food, shelter and clothing, as long as those sales are disclosed when applicable. This is why I advise anyone who is even remotely considering bankruptcy to speak with a bankruptcy lawyer at the earliest possible date. In my office, I regularly maintain files in "pre-bankruptcy" status for four, six, eight months or longer. Often the delay arises from my client's need to gain lawful benefit from assets that would be seized if the case was filed early.
A recent press release from a group called Wider Opportunities for Women reveals what many families struggling to make ends meet already know: many families with breadwinners employed full-time are unable to earn enough money to ensure a basic standard of living.
The study (discussed more below) highlights the troubling economic reality that many Americans face and could potentially help to de-mythologize the reasons people are pushed to file for bankruptcyprotection.
The Basic Economic Security Test
Here’s some background about the study and its findings.
Data collected since 1995: Over the past fifteen years, WOW has gathered data from state and federal pools (including census reports) to attempt to determine how much income is required to establish economic security across the country. The study attempts to determine not what people can survive on minimally, but how much they need to earn in order to achieve stability without help from public assistance.
Economic security numbers: The study found that a single person would need to earn $30,012 per year (about $14 per hour), a single person with two children $57,756 annually (about $27 per hour), and a family of four $67,920 per year ($16 per hour for two workers) to establish economic stability.
Minimum wage not enough: Compare the above numbers to the federal minimum wage ($7.25 per hour) and to the income identified as poverty-level for those groups ($10,830 for an individual and $22,050 for a family of four) and it’s easy to see that current diagnostic standards for “poverty” are somewhat misleading. Sources report that more than 14 percent of Americans lived below the poverty line in 2009.
Financial Stability, Emergencies and Bankruptcy
Given these numbers, it’s no wonder that millions of Americans require help from the bankruptcy court each year. One essential part of economic stability, as the report highlights, is being able to save money for emergencies. And, on bankruptcy filing surveys, filers commonly cite as reasons they filed financial emergencies such as:
Family events such as divorce, the death of a family member and the birth or adoption of a child;
Over-extension on credit (which can result from relying on credit to buy necessities); and
Unexpected expenses (like a car or home repair).
Recession Hurting Many Families
The study also showed that Americans with less education have the most difficulties finding jobs with livable wages, and that more low-income families than ever have reported not being able to afford basics like food within three months of losing their income.
A new report from Javelin Strategy & Research uncovers some potentially troubling numbers about the changing face of identity theft. Here’s a look at the report’s findings and some reminders about what you can do to protect yourself, your identity, and your credit.
In total, fewer people were victimized by identity theft in 2010: The number of identity theft cases dropped by a reported 28 percent from 2009 to last year - reports in 2010 dipped to the 2007 level. Additionally, it seems the average dollar amount of fraud committed by identity thieves dropped slightly (from $4,991 in 2009 to $4,607 last year). The group speculates that a decrease in corporate data breaches can be credited with the per-case drop-off.
More expensive fraud for individuals: While the total number of identity theft cases decreased last year, the cost of such incidents for victims rose. In fact, Javelin reports that the jump was large – 63 percent – up to $631 from $387 in 2009. This suggests that the types of identity theft being favored now are those that cost victims more (in the form of covering fraudulent debts, paying legal fees, etc.).
New account fraud most popular: The report shows that new account fraud, one of the most difficult types of identity theft to detect, accounted for a whopping $17 billion last year, the largest amount in any category. New account fraud occurs when the thief opens a new bank or credit account with the victim’s identifying information; the other type of fraud, existing account fraud, dropped in popularity last year, to $13 billion dollars’ worth, from $23 billion a year before.
There’s a better chance you know the thief: It seems that in 2010, there was a seven percent increase in fraud perpetrated by thieves who knew their victims (including family members, friends and roommates). The report notes that those ages 25 to 34 are most likely to be victimized by this type of fraud.
Sign of the times: The Javelin report suggests that, because identity theft crimes have changed in direct opposition to changing retail sales, the increase in identity theft could well be an indicator of economic hardship.
How Bad Can Identity Theft Be?
If you aren’t convinced by these numbers that identity theft can be a pain in the neck (and in the wallet), take a look at this story from ABC News, which details the saga of a man who battled for 17 years against an identity thief living across the country.
The victim found himself responsible for debts he never took on and even ended up in jail for a crime he didn’t commit. If that’s not reason enough to take steps to protect your sensitive information, consider this: despite federal protections, some bankruptcy filers still cite identity theft as one of the factors that pushes them to the bankruptcy court in the first place.
If you’ve filed for bankruptcy, you’ve probably already heard a thing or two about how important it is to rebuild your credit. A recent post at CreditBloggers.com provides an excellent guide for how, precisely, a person can begin this daunting process.
Here’s a look at some of the key tips discussed on the post.
Know Where Your Credit Stands
If you haven’t already, now is the time to visit AnnualCreditReport.com and get a free credit report from each of the big three credit reporting bureaus (every American is entitled to one free credit report per year from each bureau). When you get the report:
Review all the information carefully: Accounts that were discharged in your bankruptcy filing should have a balance of zero dollars and indicate that the debt was forgiven in bankruptcy.
Look for mistakes: Check for any incorrectly reported information – this could include a report that you still owe money on an account that was discharged.
Contest the mistakes so they can be removed: If you notice any incorrectly reported information, contact the credit reporting bureau and identify the problem. You’ll probably be asked to send written documentation that you no longer owe the debt, but the process will be worth it because the less your credit report says you owe, the better off your credit will be.
Start to Make Credit Amends
Once you’ve figured out how your credit looks, it’s time to start engaging in the kind of behavior that will replenish your credit report with positive credit actions and thus make you look like a more attractive credit risk to potential future lenders.
One of the most important things to keep in mind while focusing on rebuilding your credit is to be wary of credit scams – they abound, and scammers often target people who have recently filed for bankruptcy. Here are some common scams to avoid:
Advance fee loan scams: This term covers a variety of scams, but for people trying to rebuild after bankruptcy, advance fee scams might involve someone posing as a lender and “guaranteeing” you a loan – if you agree to pay a fee in order to have that loan offered to you. If, in fact, you were able to get a loan and make regular payments on it, the loan would likely help you rebuild your credit. But if it’s an advance fee scam, what will likely happen is your loan will never materialize and the fee you pay will be gone forever.
Credit repair scams: These, too, are sadly common. They involve a company promising to “repair” or “wipe out” your credit record – even if the information on it is completely accurate. Of course, this is not legal to do and will end up costing you money that you’d be better off saving or putting toward real credit-building ventures.
New credit file scams: This variety of scam involves a company giving you a “new credit identity” – essentially, the company gives you an Employee Identification Number (EIN) to use with the credit bureaus in lieu of your Social Security Number. The claim is that you’d get to build credit from a clean slate, but the catch is that this is highly illegal and could lead to jail time and/or hefty fines. Plus, all the time you spend building your “new” credit identity is time in which your real credit identity just languishes.
If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.
Before putting your signature on the dotted line of someone else’s loan, review the facts:
You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.
The Moral: Cosign with Caution
This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:
Making a separate contract between you & the primary borrower to define expectations;
Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
Setting aside some money specifically for covering that loan.
The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.
If you’re thinking about cosigning a loan for a friend or family member to help him qualify for better interest rates or a greater loan amount, make sure you know your responsibilities if the borrower is unable to make payments or ends up in bankruptcy.
Before putting your signature on the dotted line of someone else’s loan, review the facts:
You are considered a borrower: Even though you may have nothing to do with this loan or line of credit after you sign your name, it will appear on your credit report. This means that the primary borrower’s payment habits have the potential to affect your credit score.
Your credit may take a hit: Besides the question of timeliness of payments, having an extra loan on your credit could affect your credit in another way: by shifting your credit-to-debt ratio. This ratio (which compares your total credit limit to how much debt you have) affects your credit score, which in turn could affect your ability to get future loans.
You are agreeing to pay: According to figures from the Federal Trade Commission, of cosigned loans that go into default, 75 percent are paid by cosigners. And if the primary borrower decides to file for bankruptcy protection, you’ll likely be required to pay the loan as well.
You agree to all loan terms: This means that if the primary borrower falls behind or defaults, you’ll be responsible not only for the loan payments but also for any late fees, penalties, increases in the interest rate, and so on. Further, a debt collector could conceivably approach you for payments, and might (in extreme cases) even resort to legal measures.
The Moral: Cosign with Caution
This isn’t meant to detract people from cosigning altogether – in fact, cosigning a loan can be a great way to help a loved one build or rebuild credit. But before you agree to put your signature on lending papers, make sure you understand the potential consequences. You may want to consider:
Making a separate contract between you & the primary borrower to define expectations;
Setting up an “emergency plan” for making payments if the primary borrower thinks she might miss a payment;
Discussing the primary borrower’s income sources and spending habits to get an idea of what you’re working with financially; or
Setting aside some money specifically for covering that loan.
The bottom line is to treat a loan you’re asked to cosign as you would any other loan – after all, it could have as big an impact on your credit score and financial health.
Because I handle both personal bankruptcy cases and Social Security disability cases, I frequently get questions about the interrelationship between these two areas of law. A question I get at least once a month has to do with whether a Social Security disability overpayment is dischargeable in bankruptcy.
