Setoff Against Indebtedness Discharged in Bankruptcy

A finance officer for the Federal Aviation Administration (FAA) requested an advance decision concerning whether the agency may set off an amount representing a former employee's retirement contribution against a debt that he owed to the United States. The employee in question resigned from his position with FAA and, thereby, violated his service agreement with the agency which pertained to a long-term training program and a permanent change of station. As a result, the employee was indebted to the United States in an amount exceeding $22,000 and, after FAA set off the employee's final salary and lump sum payment for leave, his debt amounted to over $19,000. FAA notified the Office of Personnel Management of the indebtedness and of its desire to set off the employee's contributions to the retirement fund in satisfaction of the indebtedness. The employee requested a waiver of indebtedness, which was denied by FAA. Later, the employee and his wife filed a petition for bankruptcy and listed his indebtedness to FAA in the schedule of debts. The employee was granted bankruptcy, and at a later date he filed for the return of his retirement contributions. FAA argued that, according to federal regulations, it could set off the indebtedness against annuity payments or refunds of retirement contributions. GAO stated that, once the debt was scheduled and released by the discharge, the government could no longer collect that debt or any part of it by setoff or by any other legal process. GAO concluded that, since the employee filed for the refund of his retirement contributions after his indebtedness had been discharged in bankruptcy, the retirement funds held by FAA must be paid to the employee.