October 19, 2015

On October 2, 2015 the Bankruptcy Court for the Eastern District of Michigan held that you can discharge the quadruple –damage penalty incurred by overpayment of unemployment benefits through a Chapter 13 discharge.

The Court has decided whether Debtors in a Chapter 13 bankruptcy are able to discharge penalties related to the State of Michigan unemployment reporting errors.  The issue was related to the quadruple damage penalty that is statutorily assessed by the State of Michigan Unemployment Agency in certain circumstances, usually for overpayment, incorrect reporting of income, missing deadlines or similar reasons.

A number of the people receiving these penalty fees are claiming innocence, while others claim ignorance.  Regardless of intent, if the recipient of these unemployment benefits fails to meet a strict set of response requirements and deadlines to the allegations, the State is allowed to apply what amounts to a quadruple damage penalty to the amount claimed as overpaid.  In many cases, this penalty can be significant.  A number of people have turned to bankruptcy as an option to address this overwhelming debt.

In many bankruptcy cases, the State of Michigan chose to challenge the dischargeability of not only the overpaid benefit amount, but also the assessed penalties.  In Chapter 7 matters, the debt is typically not dischargeable.  However, based on a recent decision, individuals may have a way to discharge these penalty fees in a Chapter 13 Bankruptcy Proceeding.

In a Chapter 13 bankruptcy, the Debtor repays a portion of their debt over a period of time, typically three to five years. In this case, the State of Michigan challenged the discharge of the overpayment penalty.  The Judge held that penalties such as the type incurred in these unemployment matters were dischargeable upon successful completion of the Plan (not including a hardship discharge).  While the Court held the penalty portion of the debt was dischargeable, the actual amount of benefits overpaid is not.  Despite this distinction, the potentially massive amount of the onerous overpayment portion of the penalty is often the real issue, and this decision provides a substantial benefit to an individual in a Chapter 13 proceeding with this type of debt.

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