Can I file Chapter 7 Bankruptcy on unemployment insurance over payments?

In today's tough economy many individuals find themselves in a position where they are reliant on unemployment insurance to get by.  With that in mind, it is understandable why there are so many instances of unemployment insurance over payments.  The bankruptcy code treats an unemployment insurance over payment just as they do any other legal debt.  This means that unemployment insurance over payments do qualify for a discharge so long as they were not the result of fraud, and you are not still receiving unemployment benefits.

If you are still receiving unemployment insurance benefits, they are allowed to take the over payment through a "recoupment action."  This means that the over payment can be withheld from your current benefits or any future benefits.  Recoupment actions are not subject to the protection of the automatic stay in bankruptcy, and therefore need not stop upon filing nor get permission from the court after filing.  Usually, the automatic stay would prevent a creditor from taking any action on the debts. 

Fraud is a different story all together.  If the over payment was a result of fraud, which is a result of an intent to deceive, the bankruptcy court will not discharge the debt.  An example of this would be if an individual were to apply for unemployment insurance benefits after gaining employment.  This would also be an example of a crime.  In these instances the state may seek a criminal conviction resulting not only in repayment of the unemployment insurance over payment  but also possible fines and jail time depending on the circumstances.

Let us apply this to some hypothetical situations.  J. Doe has been filing for unemployment and receiving $500.00 per week for the past 6 weeks when it is discovered that he:

            a: was only entitled to receive $400.00 per week due to a clerical error in his local unemployment office, and is still filing;

            b:  he had procured full time employment and started in week three but continued to file;

and

            c: was only entitled to receive $400.00 per week due to a clerical error but had quit filing for unemployment as he procured full time employment that started in week 7. 

In Scenario A: J. Doe would owe $600.00 in unemployment insurance over payment that would be dischargeable in Chapter 7 Bankruptcy, but since he is still receiving the benefits, this amount would be withheld from his future benefits through the "recoupment action."  In scenario B, J. Doe would have committed a fraud by intentionally filing for the benefits even though he was no longer entitled to them and therefore they would not be dischargeable and he may be facing a criminal action.  In scenario C, the unemployment insurance over payment would be a dischargeable debt in a Chapter 7 filing.

Since every case is unique, and the above examples are simply generalizations, it is always best to contact a bankruptcy attorney to discuss the intricacies of your individual case.