Are Overpayment of Unemployment Benefits Discharged in Bankruptcy?

What Is Overpayment?

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.  Therefore, they can be discharged but not always.

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 Does Overpayment Occur?

Overpayment of unemployment can occur when you obtain a job but fail to notify the unemployment office or when you have notified the unemployment office, but continue to receive benefits in error and cash them or fail to return the overpayment.  If you continue to receive the benefits, you need to contact the unemployment office again to tell them to stop paying you and you need to return the funds to the State of Tennessee and not use them.  It is also a good idea to get the name of the representative you talk to when you tell the state you are working again and keep that information with your important papers.

Discharging Overpaid Unemployment Benefits in Bankruptcy

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.  Therefore, the State could argue to the Bankruptcy Court that the debt should not be discharged, but they must file this complaint arguing it should not be discharged and then it is up to the Bankruptcy Judge to determine if the debt is discharged or not.

Most of the time the State will argue fraud when they argue the debt should not be discharged.  If you are receiving unemployment benefits and then obtain employment, but fail to notify the State of Tennessee that you are now employed this could be considered fraud.  If you continue to obtain unemployment benefits even after notifying the State you are employed, this could also 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 discharged, 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.

If you have any more questions on overpayment of unemployment benefits, contact the experienced bankruptcy attorneys of Bond & Botes today for a free consultation.