“What happened to my check?!”: The Recoupment Trap

16 Apr “What happened to my check?!”: The Recoupment Trap

When you file bankruptcy, some debts are discharged completely. And some are discharged but not really, as far as some special kinds of debts are concerned. I’m not talking about unique types of debt, like child support or criminal fines, which the Bankruptcy Code does not allow you to discharge. I mean debts you can discharge. But they can sneak up to bite you later on, when you most need the protection and you won’t get it. And there’s nothing illegal about it at all.

In this case, I’m talking about debts subject to “recoupment.” It is a complicated area of law, closely related to setoff. A setoff can occur when you owe a creditor a debt on one contract (like a loan) and they owe you a debt (like a bank account); a recoupment involves debts owed back and forth under the same contract. So for example an overdraft line of credit on your checking account may exist under the same contract with the bank as your original checking account agreement — and allow the bank to “pay itself first” from any deposits you make before honoring your checks. The law treats recoupment as a defense to a demand for payment — a right to say “no” when you want your money under a deal — and not an attempt to collect a debt. Therefore, you may have discharged the debt but they can, in effect, keep collecting the debt, from the money they owe you under the same deal. With impunity.

In theory this makes a lot of sense. Why should you be able to get out of the bad part of a deal — having to pay the creditor — while keeping the good parts — like getting paid by him, in bankruptcy. That’s doing better than a “fresh start” really. But sometimes recoupment hurts those least able to afford it.

The most common instance where it comes up is in public or semi-public benefits. While not applied to Social Security overpayments, it is often applied to worker’s compensation or unemployment compensation benefits. If you received unemployment and later were found to not be entitled to benefits, you can typically discharge the overpayment debt you owe. However many courts conclude you cannot stop the unemployment agency from withholding future –deserved — benefit checks until the overpayment is repaid anyway. So the injured or unemployed worker who can’t work and has had to file bankruptcy is now forced to repay a debt she could not be sued for with the typically small benefits she needs to keep her family going.

There are plenty of legal issues that accompany recoupment disputes. But the important lesson is this: If you wipe out overpayment benefits in bankruptcy, you may or may not have really wiped it out. Check with your attorney for yourself.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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