If I Was Overpaid Unemployment Benefits And The State Wants Me To Pay It Back! Will Bankruptcy Help?

by Adrian Lapas, Esq.

October 4, 2010

I was watching the news recently and it caught my attention that the State of North Carolina says that it had paid  lots of people more than it should have in unemployment benefits.  Because of this, the State will seek to recover the amount that it claims it overpaid.  See article here

If you were receiving unemployment and the State says you were paid too much, how are you going to pay the State back if you are (a) still unemployed, or (b) now have a job but make less money and still have other bills to pay like the house and car?  Will bankruptcy help?

Typically, once you file bankruptcy, the automatic stay will serve to stop a creditor from attempting to collect a debt.  Does that mean that the State would not be allowed to get its claimed overpayment?  A careful distinction is made when there is a claim for recoupment  A recoupment is not stayed and the State may collect the overpayment of benefits by withholding future unemployment checks.

Let’s consider an example.  Suppose you are eligible for unemployment benefits and will receive a weekly check in the amount of $389.00 per week.  What if the State pays you in the amount of $489.00 per week for a period of 20 weeks.  In that instance, the State has overpaid you by $2,000.00 ($100 x 20 weeks).

Once the State figures this out, the State will request that you pay back that money back.  Of course, you do not have the money.  If you are still eligible for unemployment, the State will then reduce your future benefits to recover the overpayment.  To continue the example above, since the State overpaid you by $100 a week, the State may reduce your future benefits by $100 to recoup the overpayment–so instead of receiving $389.00 a week, you will receive $289.00 a week for the next twenty weeks.

So, how will bankruptcy help this situation.  If you are still receiving unemployment benefits when you file bankruptcy, it will not help at all.  Generally, recoupment actions are not stayed by the automatic stay so that the State can and will continue to withhold the amount it overpaid to you out of future benefits that are entitled to.

But, if you are now employed or no longer eligible to receive unemployment benefits, the overpayment is just a debt owed to the State.  It becomes a general, unsecured claim and will either be discharged or paid through your chapter 13 plan just like any other unsecured creditor.  In this instance, bankruptcy can be a big benefit in that it will discharge any claim the State may assert against you for overpayment of unemployment benefits.

It should be remembered that if the overpayment in unemployment benefits was caused by fraud on your part, that is a criminal offense and bankruptcy will not discharge that obligation.  For example, if you report to the Employment Security Commission that you are not working so you can continue to receive benefits when you really are working, that is fraud.  The State will seek to recover the overpayment and will quite possibly start a criminal prosecution.  Bankruptcy will do little to help in that instance.

This type of situation occurs with some regularity in the context of overpayments for unemployment benefits.  It also occurs with some regularity with overpayments of Social Security benefits and with long-term disability benefits through a private disability insurer.  It is important to note that a recoupment of an overpayment is not stopped by the automatic stay but a set-off of debts is stopped.

In the context of unemployment or disability overpayments, an overpayment can be recouped through a reduction in future benefits.  However, if you are no longer eligible to receive these benefits so that you do not have any future benefits from which the overpayment can be recouped, then the claim for overpayment is just another unsecured debt and can be discharged through your bankruptcy case.

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I've been practicing bankruptcy law in North Carolina since 1993, and I am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar. I have been deemed "Legal Eite" by Business North Carolina magazine and was invited to testify before a US House of Representatives committee on proposed bankruptcy legislation.

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Last modified: May 7, 2014