The employment situation in Ohio was pretty bleak for the past few years. You may have found yourself out of a job with no replacement in sight and mounting bills that had to be paid. Or you may have employment that is seasonable, such as landscaping or construction, and have to rely on unemployment compensation to cover the periods when you’re not able to do your work. For whatever reason, you applied to the Ohio Bureau of Employment Services (OBES), and were awarded a weekly benefit amount.
Time passes, and hopefully you’re back earning a paycheck. You likely have unpaid bills that you could not completely cover with the amount you received from unemployment compensation. You’re doing your best to try to catch up — and then you receive a letter from OBES explaining that they made a mistake and you had received more than you were entitled to from them. They want the overpayment returned. Now. The amount of money you owe to creditors, including OBES, has just gone up drastically. You’re now wondering if you should be looking into filing a bankruptcy to get out from under your debts.
You wisely question whether an overpayment you owe to a government agency can be discharged in a bankruptcy along with your other unsecured debts. After all, government student loans can’t be discharged. Is overpaid worker’s compensation treated differently? The answer is yes, it is!
When OBES asks for the return of money it paid out as unemployment compensation, that money is called a recoupment of overpaid benefits that the debtor was never entitled to. For example, suppose OBES has approved your application for compensation, and has calculated that you will receive a check for $390 per week for 20 weeks. They then send you checks in the amount of $490 per week for 20 weeks. They therefore have overpaid you by $2000 [$100 per week for 20 weeks]. Once OBES realizes that they have overpaid you, they will demand that $2000 back from you. You, of course, have already spent the extra money, as $390 per week is pretty tough to live on.
If you are still receiving unemployment compensation when OBES figures this out, then it will reduce your future payments by $100 per week to recoup the overpayment. So instead of receiving checks for the correct amount of $390, you will receive checks in the amount of $290 until the overpayment is made up. In that situation where you are still getting weekly benefits, a bankruptcy would not be helpful because the overpayment would not be dischargeable, nor does the automatic stay provision of the bankruptcy code apply.
However, if you are no longer receiving compensation, either because you are now employed or your eligibility has expired, then the overpayment is considered the same as any other general unsecured debt. Both chapter 7 and chapter 13 bankruptcy can help you deal with the overpayment. When a debt is unsecured, it is dischargeable in a bankruptcy. Under chapter 7, it is wiped out along with your other dischargeable debts. If you file a Chapter 13 bankruptcy, it is paid through your plan at the same percentage as your other unsecured creditors, and any remaining balance would be discharged when your plan is completed. While a chapter 7 would result in the entire overpayment being discharged without the plan payments required in a 13, it could make sense to file under chapter 13 under certain circumstances. First of all, you may not qualify to file a chapter 7 due to your income or certain other factors. Secondly, if you think that there will likely be a time in the future when you will be filing for unemployment benefits, it may be in your best interest to repay the OBES’ claim to the best of your ability.
The catch-22 with discharging overpayments in bankruptcy, especially under chapter 7, is if you have to apply for benefits in the future. It appears that the law is somewhat unsettled on the issue of OBES withholding benefits from a new claim for an overpayment owed on an old one. While most of your common creditors, such as credit cards and medical providers, are barred by law from trying to collect on the bills that were discharged in your bankruptcy, OBES benefits may be handled differently.
In situations where a person has discharged an OBES overpayment in a bankruptcy, and later on has to make another claim for unemployment compensation which is totally unrelated to the first one, Ohio bankruptcy judges have generally ruled that OBES can take the recoupment on the first claim out of the funds going to the person on the second. The judges’ ruling is in part based on an Ohio statute that gives OBES the authority to recoup overpayments from “any future benefit payment”. Over and above the statute, however, the judges have considered that unemployment compensation benefits are not the product of an employee’s labor or contributions, but are rather the result of unemployment compensation taxes paid by the employers, which funds a pool of money against which involuntarily unemployed persons may file claims and draw benefits. There is therefore a societal benefit in OBES being able to collect money it paid out mistakenly. Further, the judges have considered that a person who has filed a claim and accepted unemployment benefits has entered into a contract with OBES, and as such must accept both the benefits and the burdens of that contract. In other words, along with accepting the weekly checks, the person must accept the burden to repay overpayments by means of recoupment in the future.
Therefore, under a chapter 7 bankruptcy filing, OBES will likely pursue its recoupment from future unemployment benefits. With a chapter 13 bankruptcy filing, some portion of the overpayment will be paid into the plan, going to OBES in the same percentage amount as your other unsecured creditors, which will reduce the amount that OBES can recoup, and also may work in your favor in the attitude of OBES in going after the recoupment.
The one exception to any dischargeability in bankruptcy, however, is if the unemployment compensation was obtained by fraud. Fraud occurs when the person has no legitimate right to the benefits in the first place. If you report to OBES that you are not working when you really are employed so that you can continue to receive your weekly checks, that is fraud. If you leave your employment voluntarily and without good cause, and file for benefits, that is fraud. The judges have reasonably decided that if a person commits a fraud that is later discovered by OBES, that person should not be able to discharge it in a bankruptcy and then file another claim for benefits like the fraud never happened.
Summing up, if OBES is trying to recoup an overpayment, there is no fraud, and you don’t foresee having to file for unemployment in the future, either a chapter 7 or a chapter 13 bankruptcy would work very well for you. If you do anticipate having to file an unemployment claim in the foreseeable future and there is no fraud, you better be protected from recoupment by filing under chapter 13.
 In re: Gaither, 200 B.R. 847 (Bankr.S.D.Ohio 1996)(citing O.R.C. ¶4141.35).