setoff

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IRS Setoff Supersedes Exemption

The IRS’s right to set off the debtors’ tax overpayment against their pre-existing tax debt superseded the debtors’ right to exempt the anticipated refund. Copley v. U.S.A., No. 18-2347 (4th Cir. May 12, 2020).

When the Copleys filed for chapter 7 bankruptcy they listed a debt to the IRS of over $13,500. They also claimed their anticipated tax refund as exempt under Virginia’s exemption for “money and debts due the householder not exceeding $5,000.” They subsequently filed their tax returns which showed that their withheld income exceeded the amount they owed by over $3,000. Instead of sending the Copleys a refund, however, the IRS notified them that it had used the overpayment to set off the pre-existing tax debt. The debtors filed a complaint in the bankruptcy court seeking an order requiring the IRS to turn over the tax refund to the debtors. The bankruptcy court found that the refund was part of the bankruptcy estate and that the exemption superseded IRS’s right to set-off. The district court affirmed. [Read more…] about IRS Setoff Supersedes Exemption

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Debtor Wins Battle of the Code Sections: Exemption vs Set-Off

A debtor’s right to an exemption for a tax refund overrides the IRS’s right to set-off of that refund to pay tax liabilities. United States of Amer. v. Copley, No. 16-207 (E.D. Va. Sept. 10, 2018).

In their chapter 7 bankruptcy, Matthew and Jolinda Copley listed tax liabilities for the years 2008, 2009, and 2010, as priority claims held by the IRS. They also sought to exempt their 2013 tax refund of $3,208.00. But the IRS withheld the refund as set-off against a portion of the tax debts. The bankruptcy court ordered the IRS to turn over the refund to the debtors. [Read more…] about Debtor Wins Battle of the Code Sections: Exemption vs Set-Off

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Circuit Court Addresses “Insufficiency” Calculation for Purposes of Set-Off

In calculating set-off under section 553, the bankruptcy court properly used the amount of the back-award accrued from the date of the debtor’s eligibility even though the debtor was not entitled to receipt of those benefits until within 90 days of filing her bankruptcy petition. Berg v. Social Security Admin., 900 F.3d 864 (7th Cir. 2018).

For a time, and through no fault of her own, Peggy Berg received social security benefits after she was no longer eligible. When the SSA caught its error, Ms. Berg began repaying the overpayment. She reapplied for social security benefits in March, 2014, and she was awarded benefits as of May, 2013. She did not receive her Notice of Award, however, until July 30, 2014. The Notice informed Ms. Berg that the SSA would set-off the almost $20,000 representing her remaining debt from the back-award it owed her. On August 7, 2014, Ms. Berg filed a bankruptcy petition and an adversary complaint seeking to reverse the set-off under sections 553(b) and 522(h). The bankruptcy court found that approximately $2,000 was improperly withheld by the SSA. The Seventh Circuit granted Ms. Berg’s petition for direct appeal. [Read more…] about Circuit Court Addresses “Insufficiency” Calculation for Purposes of Set-Off

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SSA Setoff Not Recoverable under Section 553(b)

After paying disability (SSDI) benefits to the debtor, Damas, for several years the SSA determined that it had overpaid him by $13,478. It therefore began deducting $605 from his monthly benefit. When Damas filed for bankruptcy he sought to recover the amount the SSA had collected toward this debt during the ninety day period preceding the petition date. The court granted summary judgment in favor of the SSA. Damas v. U.S.A., No. 12-15313, A.P. 12-1331 (Bankr. D. Mass. Jan. 6, 2014). [Read more…] about SSA Setoff Not Recoverable under Section 553(b)