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Can Bankruptcy Wipe Out Michigan Unemployment Overpayments?

In many cases, overpayment of unemployment benefits by the State of Michigan UIA debt can be discharged just like any other unsecured debt in either a Chapter 7 or a Chapter 13 Bankruptcy case.

By Walter Metzen

Overpayment of Unemployment (UIA-Michigan Unemployment Insurance Agency) Benefits in Michigan is an all too frequent problem, and many of my clients over the years have received letters from the State of Michigan seeking recovery of the overpaid benefits.  Sometimes the amount the State is demanding to be repaid is in the tens of thousands of dollars and oftentimes forces people into a bankruptcy case.  Given the large number of Michigan residents who received unemployment after the Covid-19 pandemic, I expect this problem to persist for years to come and likely get worse.

 

UNEMPLOYMENT OVERPAYMENT OR FRAUDULENT OVERPAYMENT?

The State of Michigan Unemployment benefits are paid out to claimants based on those claimants reporting that they are unemployed and are continuing to seek employment. When the state is seeking recovery of what they think are benefits that were overpaid, it is important to discern whether or not the overpayment that the State of Michigan is seeking to recover is simply an accidental overpayment on their part or if the State is alleging that the overpayment was incurred as a result of fraudulent acts by the recipient.  If the overpayment is not alleged to be incurred as a result of fraud, the debt will be discharged in either a Chapter 7 or Chapter 13 bankruptcy case.  The overpayment will be treated just like any other unsecured debt such as credit card debt or medical bills.  If, on the other hand, the State of Michigan is alleging that the overpayment was a result of unemployment fraud, and a Court agrees, it will not be subject to discharge in bankruptcy.

WHAT IS UNEMPLOYMENT FRAUD

Unemployment fraud is a crime, but the clients that I have represented in bankruptcy court have never been charged with a crime.  Instead, the agency is simply seeking to recover what they allege are fraudulently incurred unemployment benefits.  What does the agency consider fraud? Obviously, using someone else’s identity (their name and social security number) to file a claim is fraud, but fortunately I have not represented anyone accused of this as of yet. The most common types of fraud that I see in my bankruptcy practice typically involve acts such as working another job while collecting benefits and not reporting hours worked and earnings to the State. Failing to report refusals of work or providing a dishonest reason for separating from your employer.  Providing falsified work search efforts and failing to report not being able and available to work while collecting unemployment insurance benefits.  This last one is particularly bothersome as many of my clients who have been accused of fraud by the State fall into this category and upon talking to them, they reveal that they made every effort to communicate to the State as required but oftentimes, due either to the pandemic or high call volume, could not get through to a representative. To complicate matters, the State of Michigan began accusing people of fraud thanks to an expensive computer system known as MiDAS designed to sniff out fraud in the system.

 

MiDAS-MICHIGAN INTEGRATED DATA AUTOMATED SYSTEM

A few years ago, the Michigan Unemployment Insurance Agency (UIA) wanted to replace an older mainframe computer system with one of the goals of the new system to help detect fraud and make sure that unemployment payments were only going to people who were entitled to receive them.  The new system was called MiDAS for the Michigan Integrated Data Automated System.  Unfortunately, after the system was implemented, its finding of unemployment fraud grew by 5 times over the old system which was primarily based on human review.  These fraud findings resulted in huge amounts of fines and penalties for the UIA.  When the State of Michigan finds fraud in obtaining unemployment benefits, they asses a 400% penalty on top of the alleged overpayment.  The system failed miserably and even accused some individuals who had never even received unemployment in their lives of fraud. Although it’s a little too late, as of September 2015, the state stopped using the MiDAS system for automated fraud assessment.

BANKRUPTCY AND UNEMPLOYMENT OVERPAYMENTS

If you receive a letter from the State of Michigan UIA regarding an overpayment they are seeking to collect from you, contact my office immediately to determine if we can help you with this matter.  Please be sure to bring the letter to my office or email it to me.  Simply receiving a letter from the UIA does not necessarily mean that the agency is alleging that you committed fraud in obtaining benefits, but the letter can be a clue.  Generally, if a determination has been made as to fraud, the 4X penalties mentioned above will be assessed on top of the amount the agency considers was overpaid.  If the agency does not allege that the overpayment was incurred by fraud, the debt can be discharged just like any other unsecured debt in either a Chapter 7 or a Chapter 13 Bankruptcy case.  It should be noted however that the agency is permitted to offset the amount overpaid against any other future unemployment benefits.  If the agency is alleging fraud, they will likely instruct the Michigan Attorney General’s Office to file what is called an adversary proceeding during your pending bankruptcy case seeking to have the debt deemed non-dischargeable by the bankruptcy Judge.  My office has handled many of these cases, and even if the debt was incurred as a result of the fraud names above, we can typically negotiate a settlement with the UIA that eliminates the huge penalties assessed so long as the principal amount is repaid on a timely basis.

 

 

 

 

 

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