A colleague of mine told me about a recent call from a person who had received unemployment benefits last year, and now the State of Michigan has sent him a notice he was overpaid and is demanding return of the overpayment amount, with fines and penalties to boot. The caller explained that he was back to work, but was barely making ends meet. He wanted to know what he could do.
The State may demand return of just a portion of the benefits paid because of a calculation error for instance (I know, even if it’s not your fault), or it may demand return of all of the benefits paid because the State has determined that the recipient was not eligible to receive unemployment benefits in the first place. Unfortunately this is a fairly common situation – and people are oftentimes still unemployed, or are back to work making less money than before (and they have other debts accumulated while unemployed) – when the State sends them a repayment demand. If you are in that situation, what can you do, and will bankruptcy help? Can you include the overpayment amount as a dischargeable debt in bankruptcy?
A lot depends upon whether you are still receiving benefits. If you are, the State can recoup the overpayment from you by reducing your future benefits until the overpayment is recovered. In this situation, a bankruptcy will not help. Generally, when you file bankruptcy all creditor enforcement actions are stayed, or stopped, by order of the bankruptcy court. However, the bankruptcy stay does not extend to the recoupment of an overpayment. So, if you are still collecting benefits and the State has reduced future payments to recoup the overpayment, bankruptcy will not help.
What if you are no longer receiving unemployment benefits, will bankruptcy help you? Again, it depends.
If you are no longer receiving unemployment benefits, the overpayment amount is treated as an ordinary debt that’s owed to the State. In this case, the overpayment amount is dischargeable in either a Chapter 7 or a Chapter 13 bankruptcy, with one big exception: if you obtained the benefits by fraud. Under the bankruptcy code, if you committed fraud to obtain the benefits, then the overpayment debt will not be dischargeable in bankruptcy.
Okay, let’s say the overpayment amount is dischargeable (no fraud), you may still be facing fines and penalties. What about those? Fines and penalties are dischargeable in a Chapter 13 bankruptcy; they are not dischargeable in a Chapter 7 bankruptcy.
As with any serious legal matter, you should carefully assess your situation with an experienced attorney to determine whether bankruptcy may be an appropriate solution if faced with a demand from the State to recover an unemployment benefit overpayment.