Dept. of Defense Did Not Violate the Automatic Stay When it Offset Debtor’s Tax Refunds to Pay Non-Dischargeable Pre-Petition Debt

Dept. of Defense Did Not Violate the Automatic Stay When it Offset Debtor’s Tax Refunds to Pay Non-Dischargeable Pre-Petition Debt

Before the Court is the Motion For Contempt and Sanctions (“Motion for Contempt”,  filed by the pro se Debtor (“Debtor”) against the United States Department of Defense (“DOD”) for alleged violations of the Chapter 7 discharge injunction and automatic stay, effected by the Defense Finance Accounting Service (“DFAS”) dispatch of collection notices and the temporary setoff of his IRS tax refunds to satisfy a debt owed it.

1. At an unknown time prior to 2006, the Debtor enlisted with the United States Army under the name  Grant. In or about March 2006, while on leave from the army, the Debtor changed his name from Grant to Lewis in the State of Connecticut.

2. On or about December 6, 2007, the Debtor was arraigned, sentenced, confined and discharged from the United States Army by General Court-Martial Order Number 17 (“Court Martial”) after pleading guilty to larceny, fraud, and other charges. The Debtor was sentenced to 27 months confinement, discharged from the service with a bad conduct discharge, and ordered to forfeit all pay and allowances.

3. On August 3, 2009, DFAS sent a letter to the Debtor informing him of its intent to collect a debt in the amount of $35,608.27, representing the overpayment of monies for housing fraudulently received by the Debtor, and the overpayment of pay or allowances while the Debtor was absent from the military without leave, including his period of confinement. Due to nonpayment, in or around November of 2009, DFAS transferred the debt to the Treasury Offset Program (“TOP”) for collection. 

4. On or about June 14, 2010, the Debtor called DFAS to dispute the debt and was advised to submit a request for review. Three years later, on or around December 24, 2013, DFAS received a dispute request from the Debtor and began its investigation. 

5. On or around July 7, 2014, the Debtor called DFAS and, identifying himself as Lewis, stated that the debt was not his, and although DFAS had the correct social security number, he was never in the military. DFAS then requested copies of his social security card and other identification.  The same day, the Debtor sent an email to DFAS stating that the debt was “in no way associated” with him.  The Debtor attached to this email his social security card, Connecticut driver’s license, and passport, all of which bore the name  Lewis.

6. From July 2014 to February 2015, the Debtor made several calls to DFAS requesting information on the progress of the investigation and reaffirming that the debt was not his.

7. On or about February 11, 2015, DFAS determined that the debt was valid and owed by the Debtor, and informed him that collection would continue . Three weeks later, on March 4, 2015, the Debtor filed a Chapter 7 bankruptcy petition. 

8. The Debtor filed his petition under the name Andre E. Grant, and also disclosed his name change to Lewis. The Debtor’s Schedule F listed the DOD as a creditor in the amount of $38,000.00.

9. The matrix on the Debtor’s petition indicates that service to DOD was made to its office located in St. Louis, Missouri. The official DOD office where bankruptcy notices are sent and processed in normal course is located in Indianapolis, Indiana.

10. DFAS received notice of the Debtor’s bankruptcy filing on March 12, 2015, and on the same day instructed the Treasury Department to remove his debt from TOP.  Due to a processing delay  DFAS was unable to remove the debt from TOP prior to the interception and setoff of his 2014 tax refund on or around March 31, 2015, in the amount $3,557.00.  DFAS requested a reversal of the setoff on or around April 1, 2015, and delivered it to the Debtor, in addition to a $17.00 Treasury Department fee, on or around April 24, 2015. 

11. A Chapter 7 discharge was entered in favor of the Debtor on June 10, 2015, and the bankruptcy case was subsequently closed on July 1, 2015.

12. After receiving notice of his bankruptcy discharge on September 29, 2015, DFAS sent the Debtor a letter notifying him of its intent to resume collection of the debt on the grounds that it was non-dischargeable.  It subsequently mailed him an account statement on October 30, 2015. Due to nonpayment, on January 11, 2016, DFAS again referred the debt to TOP.

13. On or around January 19, 2016, the Debtor called DFAS and again claimed the debt was not his, and inquired as to why it was not discharged in his bankruptcy. After calling the Treasury Department and learning that his 2015 tax refund was or would be offset , the Debtor filed a motion to reopen the bankruptcy proceeding on February 4, 2016. The Court granted his motion, for cause shown, on February 10, 2016.

14. On or around February 18, 2016, the Department of Treasury sent the Debtor a letter informing him that part of his tax refund was applied to a debt owed to DFAS.

15. On or about February 19, 2016, DFAS received notice that the Debtor had reopened his bankruptcy, and the same day requested that his account be removed from TOP.

16. Unbeknownst to DFAS, TOP had already offset the Debtor’s 2015 income tax refund in the amount of $7,738.00 on or about February 18, 2016.

17. DFAS requested a reversal of the setoff on March 11, 2016  and a refund in the amount of $7,738.00, as well as a $17.00 Treasury fee, were delivered to the Debtor on or around March 24, 2016.

The Motion for Contempt alleges that the DOD violated the automatic stay and discharge injunction by offsetting his tax refunds during the pendency of his bankruptcy, and by sending notices of intent to collect the debt following his discharge from bankruptcy. The Debtor asks that the Court hold DOD in contempt pursuant to 11 U.S.C. § 524(a)(2), and award actual damages, costs and attorney’s fees, emotional damages, and punitive damages.

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