In December 2010, the Social Security Administration the Debtor of an alleged overpayment of SSI benefits, seeking repayment of $11,585. In March 2011, the Debtor received a “Notice of Award” for Social Security Disability (“SSD”) benefits of $1,001.00 beginning March 2011. Also in March 2011, the Debtor was notified of SSA’s decision that she was entitled to receive a monthly payment of $674.00 and retroactive SSI benefits from May 2010 through March 2011 totaling $7,414.00. Then on March 24, 2011, SSA intercepted the debtor’s $7,414.00 in retroactive SSI benefits, which it applied toward the $11,585.00 overpayment. The Debtor filed bankruptcy on April 7, 2011, and subsequently sought turnover of the $7,414.00 seized within 90 days of the filing of her petition.
11 U.S.C. § 553(a) recognizes and preserves the right to setoff that exists under applicable state law where the following four conditions are met:
(1) the creditor must hold a “claim” against the debtor that arose before the commencement of the bankruptcy case;
(2) the creditor must owe a “debt” to the debtor that arose prior to the commencement of the bankruptcy case;
(3) both the “claim” and the “debt” must be mutual; and
(4) both the “claim” and the “debt” are each valid and enforceable.
§ 553(b), however, expressly prohibits any creditor from improving its position through a setoff within the 90-days prior to the filing of the bankruptcy petition and allows a Trustee to seek turnover of such funds. (§ 522(h) allows the Debtor to exercise the trustee’s power to recover property improperly setoff under § 553(b) if such property could be exempted.) The existence of an insufficiency, i.e. the amount owed to the creditor exceed the amount owed by the creditor, presumes that there is a mutual debt between the parties. Here there was no mutual until March of 2011, when the SSA did first decided that it owed the Debtor $7,414.00, but as that date was withing 90-days of the filing of the petition, the Debtor was entitled under §553(b) to return of the seized funds.
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