Can I Discharge Unemployment Overpayment in Bankruptcy?

When your budget is stretched to its limits, any additional expense can break you. That’s what many Alabama residents are facing as the Alabama Department of Labor continues to seek repayment of overpaid unemployment. If you’ve been asked to repay unemployment overpayments, just as you start to get back in order after the pandemic, what are your options?

If you’re considering bankruptcy, you may wonder if your overpayment is dischargeable or if you’ll still be on the hook for it after your debt is discharged. Learn more about this unique issue, and to discuss your bankruptcy case in greater detail, call Padgett & Robertson at 2511-336-3695.

Alabama’s Overpayment Issue

Many states have a serious issue with an overpayment of unemployment, but not every state has handled it the same way Alabama has. While some states have sought to have overpayments forgiven and written off with the help of the federal government, Alabama has not taken steps to do so.

In the early days of the pandemic, the state’s Department of Labor was so overwhelmed with applications and calls that they had no chance to process claims properly. Consequently, some people received benefits when they should not have. In total, over $164 million was overpaid. Now, people are being asked to pay it back. For some, this adds up to tens of thousands of dollars—an unmanageable sum for those who were completely or partially unemployed during the pandemic.

In Most Cases, These Debts Are Dischargeable

The good news: unemployment overpayment is dischargeable in bankruptcy. There’s a common misconception that it cannot be discharged since it is owed to the government, much like some student loans and tax debts. However, the bankruptcy court does not look at this debt any differently than it looks at other unsecured debts. Assuming that your discharge is granted, your overpayment will be erased as well.

The One Exception

There is one major exception to this. If you committed fraud to receive unemployment benefits when you should not have, the debt will not be forgiven. This may include filing with false information, hiding sources of income, or receiving benefits while still working at your job. If the state agency can demonstrate that you engaged in fraud to receive benefits, they may be able to force you to pay back your overpayments.

Other Options for Overpayment

The other main option available to you is to appeal the request for repayment and show that you were, in fact, owed unemployment benefits. However, don’t expect to go through this process any time soon. In 2021, the state’s average time to respond to an appeal was over 500 days. There are tens of thousands of requested appeals sitting in the backlog, an issue so serious that it led one group to file a lawsuit against the Alabama Department of Labor.

The court dismissed the suit against the ADOL, noting that the agency was working as hard as it could to process appeal requests. This means that many Alabama residents may be waiting for quite a while to find out whether or not they will have to repay their overpayments.

Your Next Steps

If you’re struggling with debt and you’re not sure what comes next, it may be time to talk to a bankruptcy lawyer. Even if you decide not to go that route, it’s always helpful to know your options. Bankruptcy can discharge a wide range of debts, including unemployment overpayment and credit cards, and give you the breathing room you need to start again. However, you must meet specific requirements to file.

These requirements limit the amount of income and assets you may have if you plan on filing. The sooner you talk to an attorney and give them a full, clear picture of your finances, the sooner you can start making a plan for your future.

Reach Out to Padgett & Robertson Now

The team at Padgett & Robertson is here to help you find out if bankruptcy is a good option for you. Let us talk you through your options and your next steps. Schedule a consultation with us right away by calling 251-336-3695 or reaching out to our team online. These times are stressful—don’t face them alone.