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Bankr. E.D.N.C.: In re McGarry- Requirements for Setoff

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By Ed Boltz, 19 June, 2012
Summary: The Debtor was entitled to one-half of her ex-husband’s military retirement, but was also liable for one of their children’s student loan debts. The Debtor was in default on such payments and her ex-husband paid $4,183.07 on that debt. The property settlement required the Debtor to indemnify her ex-husband for payments on the student loan debt. 11 U.S.C. § 553(a) of the Bankruptcy Code recognizes a creditor’s right to “offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case”, recognizing setoff rights existing under applicable state or federal law, without creating new setoff rights. In this casde, Virginia law applied Setoff rights are preserved in bankruptcy if: 1. The creditor’s claim must arise prior to commencement of the case; 2. The debtor’s claim must arise prior to commencement of the case; 3. The creditor’s claim and debtor’s claim must be mutual; and 4. Both claims must be valid and enforceable. The first and fourth criteria were meet in this case. The Debtor could not, under any circumstances, have forced the liquidation of the amounts owed to her under the military retirement, as required under Virginia law, prior to filing bankruptcy. Additionally, while the Debtor had an obligation to indemnify her ex-husband for the student loan debt, her ex-husband is not the party that pays the Debtor the retirement benefits, with such payments instead being made by DFAS. As such, there was no mutuality either. Failing to meet the second and third requirements, precluded allowance of a setoff. For a copy of the opinion, please see:

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