How is an overpayment of Unemployment Compensation handled in bankruptcy – is it dischargeable?

Over the past few years, a lot of people have been losing their jobs and in order to make ends meet, they have filed for unemployment compensation benefits. In an effort to get back to a financial normalcy, they collect their benefits each week and look for that illusive job. They make things work as best they can, but then nothing happens and the bills continue to pile up. On top of those bills piling up, a letter comes from the Department of Labor explaining that the state made a mistake and they have been receiving more benefits than entitled. The Department of Labor now wants that overpayment returned. Those debtors now have another debt not contemplated and bankruptcy is now a very possible consideration. Those debtors know that unsecured debt would be discharged in a bankruptcy, but what about those overpayments?

When the Department of Labor asks for the return of money, it is called recoupment of overpaid benefits. Recoupment of overpaid benefits is simply just that, a return of money that the debtor was not entitled to. If the debtor is still collecting benefits, the Department of Labor will most likely reduce future benefits until the overpayment amount has been satisfied. Such Recoupment is not dischargeable nor does the automatic stay provision of the bankruptcy code apply.

If the debtor, on the other hand, is no longer receiving benefits because of employment or eligibility has expired, then the overpayment is considered a general unsecured debt. If the debt is unsecured, it is dischargeable in a bankruptcy.

What if the debtor needs to claim for unemployment benefits in the future? Can he collect his benefits and not be subject to a reduction of benefits based on the past discharge of the debt? In Georgia, the answer to that question is not presently known. There have been no cases brought before the court which would answer it. In other jurisdictions around the country, such reductions are possible. One way that this issue has been settled in other jurisdictions depends on whether the reduction in benefits is tied to an old transaction or a new one. If it is an old transaction (an old claim), then such reductions are allowed, but if it is a new transaction (a new claim), then reductions are not allowed.