Can Bankruptcy Discharge my Unemployment Overpayments in Michigan?

Many of our clients have collected unemployment insurance payments in the years leading up to their bankruptcy. For various reasons, our clients will occasionally receive more than they were supposed to. The State of Michigan demands that the overpayment benefits be paid back regardless of the reason behind the overpayment.

Understandably, this creates a difficult scenario for people who are already unemployed and then asked to pay back months worth of benefits. Depending on the specific circumstances to your case, these unemployment overpayments may be dischargeable in bankruptcy.

The State of Michigan’s Department of Licensing and Regulatory Affairs (LARA) has more information about how these unemployment overpayments are dealt with outside of bankruptcy.

If you’re still receiving unemployment benefits

If you’re still unemployed and receiving benefits then the state will recoup the overpayment by taking a portion of your ongoing benefits. This recoupment action will continue until the overpayment amount is paid. This recoupment is not subject to the Court’s automatic stay and will continue even after filing for bankruptcy.

MCL 421.54 and MCL 421.62¬†cover the penalties and recovery of unemployment overpayments. If you’re no longer receiving unemployment you’ll usually be able to discharge that debt in bankruptcy unless the overpayment is determined to have been fraudulent.

When is an overpayment fraudulent?

The Bankruptcy Court treats unemployment overpayments the same as any other unsecured debt. Because debts that are incurred by fraud aren’t wiped out in bankruptcy neither are unemployment benefits if there was an intent to deceive by the debtor in order to get those benefits. Section 523(a)(2) of the bankruptcy code discusses fraud.

In recent years, the Michigan Attorney General’s office has taken a more aggressive stance in how they handle these overpayments in bankruptcy. If you’ve received a letter stating that your overpayment is considered fraud or the result of misrepresentation then the State will probably file an adversary proceeding objecting to the discharge of their debt.

Bankruptcy options for unemployment debt

A¬†letter from the State isn’t a determination that the debt will be found to be fraudulent in bankruptcy, but it’s a good clue as to whether or not they’ll fight you on the issue. Oftentimes the fines and penalties associated with the overpayment greatly outweigh the original amount that was overpaid. The principle amount originally owed is dischargeable but the fines are not(in a Chapter 7 – see 523(a)(7)).

In a Chapter 13, the penalties would be wiped out if properly listed in the petition and there is no adversary filed in the case. In either a Chapter 7 or a Chapter 13, however, the Michigan Attorney General appears willing to negotiate a settlement. While it’s impossible for us to tell you what would happen in a specific case, we’ve had success getting rid of all the fines (usually 4 times the amount owed) if the debtor stipulates to paying back the principle that was overpaid. If the debtor defaults then the State will accelerate the entire amount due.

Call our office if you were overpaid for unemployment and now the State is trying to collect. It’s impossible for us to tell you in a post like this exactly how your scenario will play out without knowing the facts specific to your case. The bottom line is that unemployment overpayments are just like any other debt in bankruptcy; you’ll be able to discharge the debt unless it’s found to be fraudulent. But even if it turns out to be a fraudulent debt our office has experience working with the State in order to reach a reasonable settlement.