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Can You Discharge Overpayment of Unemployment Benefits In Bankruptcy?


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In March 2020, thousands of businesses were forced to shut down, many Americans were left without a job, and millions applied for unemployment benefits. According to State of New Jersey’s Department of Labor & Workforce Development, the Department received over 2 million applications for unemployment benefits from March 2020 through February 2021.

Now that the dust is finally settling, and New Jersey residents are going back to join the workforce, a lot of people are starting to receive notices from the State for overpayment of unemployment benefits. This is largely due to changes in federal rules on eligibility requirements that occurred on or around March 2021. Unfortunately, these changes caused 250,000 New Jersey residents to become ineligible for pandemic unemployment compensation and were overpaid their unemployment benefits as a result.  

The good news is that as of February 8, 2022, the U.S. Department of Labor gave States authority to waive certain unemployment overpayments as long as certain requirements are met, and no fraud was committed by the applicant 

 

Bankruptcy & Non-Dischargeable Debts 

When someone files for bankruptcy, most debts will be dischargeable except for those listed under 11 U.S.C. Section 523 of the Bankruptcy Code – often referred to as non-dischargeable debts (debt you cannot get rid of through a bankruptcy). A perfect example of non-dischargeable debt is debt incurred through fraud. For example, and as Section 523 explains, if you have debt that was incurred through fraud (i.e. you lied on your credit card or loan application in order to ensure that you be given credit or a loan),  you can still be liable to pay back that debt even after your bankruptcy case is completed.  

Now, there is a lot that the creditor will have in order to have the debt declared non-dischargeable (i.e. your actions rose to the level of “intent to commit fraud”). Assuming the creditor can (i.e. presents evidence that you intended to and lied on your credit or loan application in order to receive funds), the debt is then declared non-dischargeable.  

With that said, incurring debt through fraud is one example where a debt could possibly be considered non-dischargeable, and when it comes eliminating debt due to overpayment of unemployment benefits in bankruptcy, fraud plays a huge part. 

 

Overpayment of Unemployment Benefits are Usually Dischargeable 

Ordinarily, if you file a Chapter 7 or Chapter 13 bankruptcy, you will be able to discharge any overpayment of unemployment benefits as unsecured debt (i.e. credit cards and medical bills etc.) since these are the types of debts that are not listed under Section 523 as explained above. I know this sounds counterintuitive because it is money owed to the State, but overpayment of unemployment benefits is not given special protections – even if the debt is owed to a State agency. Therefore, if the State made an error when it overpaid your unemployment benefits, you can eliminate the obligation to pay back the debt by filing bankruptcy.  

But what if the State did not make an error and the State is alleging you committed fraud? 

 

Overpayment of Unemployment Benefits and Fraud 

In the State of New Jersey, to receive your unemployment benefits, you must certify for benefits each week. When you certify, you are usually asked the following questions 

  1. Were you able and available for work? 
  1. Were you actively seeking work? 
  1. Did you refuse any work? 
  1. Were you attending school or job training? 
  1. Did you receive holiday or vacation pay for the week beginning on mm/dd/yy and ending mm/dd/yy? 
  1. Are you receiving or have you applied for a pension or other retirement pay from any of the employers listed below? 
  1. Did you work between mm/dd/yy and ending mm/dd/yy? 

Now, these questions are simple and straightforward, but you’d be surprised how many people answer these questions incorrectly or worse yet – lie. If you made an error when you filed the certification, it probably won’t be held against you. However, if you lie in your certifications, you’ve committed fraud, and as we’ve already discussed, debt incurred through fraud is usually deemed non-dischargeable by the Bankruptcy Court. To do this, the State would have to prove that you intended to defraud the State. How does it do that? They will present your weekly certifications as evidence of the fraud.  

Therefore, and to put it all into perspective: if you lied in order to obtain unemployment benefits, and the State is alleging that you have committed fraud, it is very unlikely that the overpayment of unemployment benefits will be eliminated in a bankruptcy.   

If you’re asking yourself “but how does the State find out that I was working while I was receiving unemployment?” Very easily: the State will look at your tax returns. 

When it comes to eliminating overpayment unemployment benefits, you may be able to eliminate the debt. However, and as explained above, you will only eliminate the overpayment unemployment benefits as long as you didn’t commit fraud and lie while filing your weekly certifications.  

If this sounds anything like your situation, the best thing for you and your peace of mind is to speak with an experienced bankruptcy attorney to discuss your options for your particular situation. Give me a call today for a free consultation.  



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