Overpayment of Unemployment Benefits are subject to discharge in both chapter 7 and chapter 13 bankruptcies. The overpayment of unemployment benefits are not given special protections, even if they are owed to the state. An unemployment overpayment is not a debt that is listed as exempt from discharge. Filing for bankruptcy can provide significant relief from the collection efforts of the state. The automatic stay will help stop collection efforts from the state to pay back the unemployment benefits.
When you file your bankruptcy, your bankruptcy petition will include the State of Tennessee for the overpaid unemployment benefits. The State would get notice and they would have an opportunity to file an adversary proceeding alleging fraud pursuant to 11 U.S.C. Section 523(a)(2) of the Bankruptcy Code if they believe the debt should not be discharged. Most of the time fraud in this situation occurs when you are receiving unemployment benefits and then obtain employment, but fail to notify the State of Tennessee that you are now employed. If you continue to obtain unemployment benefits, this could be considered a fraud against the State of Tennessee and may not be discharged. If the State fails to file the adversary proceeding timely and your discharge is granted, then the overpayment of unemployment benefits would be discharged, even if they were obtained by fraud.
You should be aware that even if the debt for an overpayment of state benefits such as unemployment is discharge, the state can still “recoup” future benefits. This means that if you apply and qualify or future benefits, the state can take those benefits or a portion of the benefits and apply them to the prior discharged debt.