In bankruptcy generally you can discharge the unemployment overpayments. Unemployment benefits or EDD overpayments (in California) are treated like any other debt in bankruptcy. They are not given special protections, even if they are owed to the state. Section 523 of the bankruptcy code lists those debts that are non-dischargeable in bankruptcy. An unemployment overpayment is not a debt that is listed as exempt from discharge. It is subject to discharge in a Chapter 7 and Chapter 13 bankruptcy. 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.
Unemployment benefits only pay a portion of the normal wages that individuals received from their previous employment. Unemployment benefits are generally paid based on calculations from your previous earnings. In California unemployment benefits are calculated based on a specific 12-month period. Overpayments in unemployment can result from a number of reason including incorrect calculations, payments issued for period in which the claimant did not qualify for benefits or reporting false information.
Can You Always Discharge Unemployment Overpayments?
The simple answer is no. If you obtained an unemployment or EDD overpayment as a result of fraud, then it may not be subject to discharge in bankruptcy. Section 523 of the bankruptcy code makes the following debts non-dischargeable.
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(B) use of a statement in writing—
If you submitted an unemployment claim that was false or you provided false information and as a result you were overpaid benefits, then it may not be dischargeable. When you file your bankruptcy case, the state unemployment department will be given notice of your bankruptcy case. They will be given an opportunity to file a complaint to determine dischargeability. If they believe that the debt meets the requirements for being non-dischargeable then they must file a complaint in bankruptcy court. If they fail to file a complaint in your bankruptcy case then it will be discharged regardless of whether it was obtained by fraud. For more on non-dischargeable debts go to Non-Dischargeable Debts:
Can The Unemployment Overpayment Ever Be Collected?
Unemployment overpayments or EDD overpayments are subject to recoupment. This means that if you are receiving unemployment benefits they can continue to withhold benefits until the overpayment is fully paid back. In a sense this means that although technically the debt has been discharged in bankruptcy, you may still end up paying the debt back through recoupment. The automatic stay or a discharge in bankruptcy does not protect you from recoupment of the unemployment benefits.
- How does recoupment work?-You may owe the EDD an overpayment of $3,000, as a result of them paying you an additional $150 a week in benefits. If you are still receiving EDD then the EDD may deduct $150 per week from your unemployment benefits even after filing for bankruptcy. They will deduct this amount until your overpayment is paid back in full.
Recoupment only applies where the claim for unemployment and overpayment arose out of the same transaction. The state unemployment agency would be able to recoup the overpayment as long as the overpayment resulted from the same claim that they are currently paying you on. Based on the reading of the requirements of recoupment it would appear that recoupment would not apply to any future claims for unemployment but only to the claim in which the overpayment arose. (This remains unsettled). If there is an attempt to collect an overpayment and it is for a separate unemployment claim, then the state may be subject to violation of the discharge injunction.