What Happens if I Owe Unemployment & File Bankruptcy?
- Certain types of debts can't be discharged through the federal court system. For example, if you have a student loan or owe back child support or alimony, those debts cannot be discharged through bankruptcy. If you owe a lender money for a home or a car, those debts may be negotiated but they cannot be eliminated (unless the asset is sold to repay the loan). Alternatively, credit card debts and some types of unemployment debts may be discharged.
- Sometimes unemployment overpayments are made in error. According to Gorelik Law, these types of overpayments are discharged "like any other unsecured debt." There is a big caveat; if you willfully filed for unemployment when you were no longer eligible for it -- for example, if you got another job but continued to file anyway -- then that constitutes fraud. Fraudulent debts, as noted in Section 523(a)(2) of the bankruptcy code, are not dischargeable in federal court.
- If you've committed unemployment fraud, you'll have bigger problems than whether or not the debt can be discharged. In addition to having to repay the funds, you may be subject to prosecution. There are a variety of ways to commit fraud in the government's eyes. Working and failing to report it while collecting benefits is a crime. Even failing to be "ready, willing and able" to work is fraudulent. Using another person's identity or helping another person file a false claim is illegal, too.
- Things get complicated if the unemployment overpayment has already begun through "recoupment." If you are still receiving unemployment payments and your state is withholding a portion of your current unemployment payments to repay the old debt, that's recoupment. According to Gorelik Law, this applies as recoupment rather than collection -- and guess what? Funds secured through recoupment are not subject to the bankruptcy code.