There is many times where recipients of social security or even long-term disability are faced with a situation where the SSA or their insurance company tells them that they have overpaid them. Generally, if the recipient has been receiving the long term disability and, subsequently, applies for SSA and is approved, the recipient will be notified that under their insurance policy the overlapping payments would require the long term disability to have ceased or reduce significantly from what it used to be. This would mean that the recipient has been “overpaid” for the overlapping period.
What does this mean?
This means that the recipient is now burdened with a debt that may be more than they could afford to pay back.
Bankruptcy can discharge your overpayment owed
Simply, by filing a bankruptcy, the overpayment can be discharged subject to an objection that may be filed by the SSA or the insurance company on the basis of fraud. SSA or the insurance company has the burden to prove that the recipient committed fraud or misrepresentation in obtaining the benefit, but rarely does so.
Exceptions: Recoupment – SSA v. Long term disability
However, although the person’s personal liability to the overpayment is discharged, depending on if it is the SSA or insurance and whether or not you will continue to receive such benefits, the ability for “Recoupment” may come into affect.
Recoupment is an “equitable defense” theory that is outside the limitation of the bankruptcy code. As such allows for off-setting the amount owed from your on-going benefit received.
If the overpayment is made by the SSA and you will continue to receive the benefit after filing the bankruptcy, than the recoupment theory will not apply and you can continue receiving the regular payment.
However, if the overpayment was made by your long-term disability under your insurance, case law have reached a different conclusion. The theory of recoupment will allow your insurance to “recoup/off-set” the amount that was overpaid from your “on-going” future payments. Although, you will not be personally liable, the insurance company can off-set the overpayment from your future benefits.
If your long term disability ceases or ceased, than the debt arising from the overpayment will be discharged in the bankruptcy.
Couple of cases addressed the issue above and the citation is provided below:
In re Caldwell, 350 B.R. 182 (Bankr. E.D. Pa. 2006)(distinguishing Lee v. Schweiker, 739 F.2d 870 (3d. Cir. 1984))(SSA is a govern by a “social welfare” statute that is an “entitlement” compared to the case in hand where the benefit is governed by a “contract” between the parties”))
In re Terry, No. 08-43123, Adv. No. 09-3031 (Bankr. W.D. Mo 2010)(affirming In re Caldwell, theory of recoupment applies to long-term disability)
In re Beaumont, No. 09-7006 (10th Cir. 2009) (Theory of recoupment does apply to VA overpayment)