In Re Hurt

579 B.R. 765 (2017)

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Nature of the Case

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Facts

P obtained a Title I loan from HUD to purchase a manufactured home. The original principal amount was $38,463.00. P also executed a 'Notice to the Borrower of HUD's role in Title I Loans.' the Notice advised P that 'Failure to pay this debt to HUD may result in offsets of Federal payments due to you, including Federal income tax refunds . . . .' P failed to make payments. As of July 20, 2016, the outstanding balance was $18,301.93. On August 22, 2016, HUD sent a 'Notice of Intent to Collect by Treasury Offset' to P. No response or objection to the Notice was received by HUD or Treasury in response to the Notice. Prior to February 23, 2017, P filed their 2016 income tax return with the Internal Revenue Service. Treasury owed a tax refund to P in the amount of $5,267.00. On February 23, 2017, Treasury processed the request from HUD and offset the tax refund amount due to the Debtors and, instead, paid it to HUD to satisfy a portion of the indebtedness due on the Loan. P filed a Chapter 7 bankruptcy petition on March 3, 2017, listing the tax refund as exempt under Schedule C pursuant to Virginia Code Sections 34-4 and 34-14 for $1,098.00 and also under Section 34-26(9) for $4,169.00. On April 10, 2017, P filed a Homestead Deed dated March 3, 2017, in the Clerk's office of the Circuit Court of Tazewell County, Virginia. The Deed claimed the following as exempt property: (a) Wages garnished by U.S. Dept. of Treasury in the amount of $269.79; (b) funds on deposit in the amount of $600 and, (c) 2016 tax year income tax refunds in the amount of $549. On April 10, 2017, the female debtor filed a Homestead Deed dated March 3, 2017, in the Clerk's office of the Circuit Court of Tazewell County, Virginia. The Homestead Deed claimed the following as exempt property: (a) funds on deposit in the amount of $600 and, (b) 2016 tax year income tax refunds in the amount of $549. Id. at ¶ 11. The amount of the indebtedness listed by Ps as owing to HUD was $26,600.00, arising from 'foreclosure deficiency on a home.' HUD records reflect a balance due of $14,417.44 as of the filing date, March 3, 2017. Ps filed an adversary proceeding against HUD seeking the return of their tax refund as a setoff that occurred within 90 days. Ps make their claim pursuant to. §§ 522 and 542. HUD argues that Section 547 preference claims are inappropriate in this case, that the Debtors could not exempt their tax overpayment under Section 522, and that the Debtors cannot invoke Section 553(b) of the Bankruptcy Code in order to set aside an improvement in HUD's position pre-petition.