Can Unemployment Overpayment Be Claimed in Bankruptcy?

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Unemployment overpayments happen all the time, especially during economic downturns -- Michigan saw a 40 increase in unemployment insurance fraud between 2008 and 2009, according to The Crime Report. Overpayments do not always occur due to fraud, and if you cannot repay an unemployment insurance overpayment, you might be able to discharge the debt in bankruptcy. However, you may not have enough time for the judge to eliminate this debt even if you file today.

Identification

You can discharge an unemployment insurance overpayment in bankruptcy, because bankruptcy courts treat this as a legal debt. This can only happen when you no longer receive unemployment benefits. If you work, you must repay the UI overpayment through your weekly salary, or future benefits if you still receive UI. This is called a "recoupment action." Recoupment actions are not subject to automatic stay protection. Under normal circumstances, an automatic stay prevents creditors from taking any action on your debts.

Fraud

Under no circumstances will a bankruptcy court discharge a debt due to fraud. Also, if you acquire unemployment benefits due to fraud, such as purposely applying for benefits after gaining employment, the court may suggest the state attorney general pursue criminal charges. Criminal conviction may include a fine and jail time, but courts usually want to recoup the lost benefits instead of punishing you with jail time unless the case involves extreme fraud.

Alternative to Bankruptcy

Declaring bankruptcy over unemployment insurance overpayments is a poor idea, especially if you do not have thousands of dollars in total unsecured debt, because filing for bankruptcy cost several hundred dollars, not counting legal assistance you may need. Most unemployment agencies know that repaying an overpayment can cause a financial hardship, so they usually offer an installment plan. This may be better than potential actions the state may take, such as levying your bank account.

Tip

Consult a bankruptcy attorney to determine if you can or should try to discharge unemployment insurance overpayments in bankruptcy, especially if the state might be able to prove fraud. Also, talk to your previous employer about how many hours you worked. The state's claim of an overpayment may not be true, in which you can ask for a waiver.

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