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A Debtor Successfully Avoids a Payment Made to a Governmental Unit from the Debtor’s Tax Refund Towards Reimbursement of an Overpayment under § 547(c)(7).

November 16, 2017, IllinoisDebtor Halbert applied for and received Supplemental Nutrition Assistance Program from Defendant Illinois Department of Human Services (DHS) for herself and her two minor children. The Debtor received payments from DHS for more than a year based on a household size of three.

Subsequently, DHS determined that the Debtor had failed to disclose certain income, and, therefore, all of the benefits received had been overpaid, amounting to a total overpayment of $3,394. In 2015, DHS utilized its offset rights to intercept the amount due to overpayment from the Debtor’s income tax refund.

Post his bankruptcy; the Debtor initiated a lawsuit against DHS seeking to recover the offset amount as a preferential transfer. DHS countered that the payment is protected by Section 547(c)(7). Section 547 (c)(7 )insulates bona fide transfers or payments made on account of debts that are in the nature of support (including assistance provided by a governmental unit) of a given debtor’s spouse, former spouse, or child (or that child’s parent).

DHS asserted that because the debt was for the overpayment of funds used to support the Debtor’s children, the debt was “in nature” of support of those children under §101(14A). The Debtor countered that the debt is for the return of value/funds that should never have been paid in the first place, and was, therefore, not “in the nature of support” because that debt was an independent debt.

The Court concluded that the alleged debt paid to the Debtor was not in the nature of support of the Debtor’s children. The debt owed to DHS was merely a debt to the government for the return of benefits that should never have been paid to the Debtor at all, and that debt does not automatically retain any supportive nature that the benefits may have had.

Thus, the Court held that the stipulated facts did not prove that the alleged transfer DHS received out of the Debtor’s tax refund was “a bona fide payment of debt for a domestic support obligation and hence, a preference under §547(b), with no defense under §547(c) having been proven.

Halbert v. Dimas (In re Halbert), No. 16-13005 Chapter 7, 2017 Bankr. LEXIS 3998 (Bankr. N.D. Ill. Nov. 16, 2017)