What happens if the Social Security Administration (“SSA”) overpays a recipient? The recipient owes the government amount of the excess payments. As a result, the SSA may reduce the recipient’s future benefits by the amount of the prior overpayments until the excess payments are recovered.
Must Social Security overpayments be repaid if the recipient files bankruptcy? In other words, can the government recover the past overpayment amount by reducing future benefit payments?
The short answer to that question is “no.” In the absence of fraud, the debt is discharged, and the SSA may not reduce future benefit payments to setoff against the past overpayments. In Lee v. Schweiker (3d Cir. 1984), the U.S. Court of Appeals held that the SSA may not recover previous overpayments from benefits payable after a bankruptcy petition is filed.
The rationale for the Third Circuit’s ruling was that a recipient of retirement insurance benefits does not become entitled to those benefits for each month until the recipient survives through the last day of the month. The court contrasted this situation with that of recoupment in a contract situation, in which the creditor seeks recovery of the amount of the debt from funds associated with the same contractual transaction. The court also noted that the primary purpose of the Social Security system is to provide income security to recipients, and that this purpose would be undercut by allowing the SSA to reduce future benefit payments payable after a bankruptcy petition is filed to recover the amount overpaid.
Lee was decided in 1984, but remains good law. The question was recently revisited in In re Otto, a case before a Texas bankruptcy court decided in April of 2013. In Otto, the court relied on Lee and held that in the absence of fraud, the SSA may not reduce future benefits as an offset against past overpayments once the recipient has filed bankruptcy.