The answer to whether or not unemployment benefits are dischargeable in bankruptcy hinges on the following: 1) whether the state receives adequate notice of the bankruptcy filing; 2) whether the state upon proper notice brings a timely complaint (adversarial proceeding) in the bankruptcy court, and 3) whether the state wins its complaint and proves that the debtor obtained the unemployment overpayment by fraud or theft as opposed to having made a reasonable mistake.
A debt that is discharged in bankruptcy is a debt that is no longer enforceable. The general rule is that a debt is dischargeable at the conclusion of a Chapter 7 or a Chapter 13 bankruptcy case absent some specific statutory provision to the contrary. The exceptions to discharge are primarily enumerated in sections 523, 727, 1228 and 1328 of the United States Bankruptcy Code.
Some of the provisions of the Bankruptcy Code are “self-executing” excluding a debt from discharge automatically even if the creditor does not challenge the dischargeability of the underlying debt. Specifically these sections include, 11U.S.C. §523(a)(1), (3), (5), (7), (8), (9), (10), (11), (12), (13), (14), (16), (17), (18), or (19). However, other provisions of the bankruptcy code require that the creditor file a separate complaint known as an adversarial proceeding within a strict time frame otherwise the underlying debt is discharged. The provisions of the Bankruptcy Code that might bar the discharge of an overpayment of state unemployment benefits are not self-executing. These three provisions fall under 11 U.S.C. § 523(a)(2), (4), (6), and (15). Of these provisions only 523(a)(2) and (a)(4) would seem applicable. These two provisions are known as the “fraud” provisions. Accordingly in order for the state to prevail in excluding unemployment overpayments from discharge, they must prevail in a timely filed fraud complaint brought in the U.S. Bankruptcy Court.
In general, a complaint to determine the dischargeability of debt under § 523(a)(2), or (4), must be filed not later than sixty days after the first date set for the creditors meeting. Parties must have at least thirty days’ notice of this deadline. Fed. R. Bankr. P. 4007(c). However the state would need to be given proper notice so that they would have the opportunity to file a complaint and challenge the dischargeability of the overpayment pursuant to 11 U.S.C. §523(a)(3). This is why it is extremely important that all creditors be properly listed on the debtor’s bankruptcy schedules.
Again, there are two provisions of Bankruptcy Code Section 523 that if successfully brought by the state seeking to recover an unemployment overpayment claim would bar the discharge of the debt under the Bankruptcy Code. The first such provision is found under 523(a)(2).
Section 523(a)(2) excepts from discharge debts incurred in obtaining money, property, or services by false pretense or fraud. Accordingly, the debtor who knowingly made a false statement on his unemployment application or continuing unemployment forms would be excepted from discharge under this provision provided the state timely brought and proved their complaint. A debtor who could prove that they reasonably believed that they were entitled to the overpayment money would prevail and be entitled to discharge the debt.
The other applicable exception would come under Bankruptcy Code Section 523(a)(4). This provision bars a discharge where the plaintiff proves fraud or defalcation while the defendant was acting in a fiduciary capacity, or committed embezzlement, or larceny. These provisions would be applicable if the state were able to prove that you received an unemployment benefit by means of what is commonly known as theft. Again, the state would have to timely file their complaint and prove that that is what happened.
In conclusion, at least in California in my experience rarely does the state when properly notified challenge the overpayment by timely bringing an adversarial complaint. Accordingly, it is critically important that the overpayment claim be listed on the debtor’s bankruptcy schedules and that notice to the state be properly addressed. For California overpayments you would want to notice Employment Development Department, State of California, Bankruptcy Unit – MIC 92E, P.O. Box 826880, Sacramento, CA 94280. In the event that the state brings a timely complaint, the debtor/ defendant in consultation with his bankruptcy attorney must decide if reasonable defenses exist to the state’s claim and the costs and benefits of defending the claim. Unless the facts tilt in favor of debtor / defendant it may be advisable to work out a settlement with a repayment plan. For more information contact San Diego bankruptcy attorney Raymond Schimmel at (619) 275-1250 or at http://www.endbillcollections.com.