Misstatements on Prior Benefits Applications Can Make Debt Non-Dischargeable in Bankruptcy

Court Rules That Prior Application Misstatements or Omissions Are Fraud

A bankruptcy court in Oregon has ruled that the misstatements or omissions of a debtor filing for a discharge of her debts under Chapter 7 of the Bankruptcy Code provided a State administrative benefits agency and creditor a basis for having the debt for a benefits overpayment ruled to be NOT discharged in her bankruptcy case.

This ruling is in keeping with case-law arising from the judges of the Eastern District of Michigan Bankruptcy Court here in Detroit concerning allegations of fraud in the acceptance of overpayment of unemployment benefits.

I have written about unemployment fraud claims in Michigan bankruptcy courts previously here.

This Oregon ruling, while not binding on Michigan bankruptcy courts, provides further fuel for the odd proposition locally that State of Michigan unemployment benefits overpayments are not considered erroneous ONLY in Bankruptcy Court while the State UIA’s widespread fraud allegations have been thoroughly discredited at all other levels, judicially and in the media.

But, first, when is an otherwise dischargeable debt NOT dischargeable in Bankruptcy?

Debts Excepted from Discharge in Bankruptcy Due to Fraud

In addition to the debts listed in the US Bankruptcy Code as not being dischargeable in Bankruptcy due to the nature of the debt itself (e.g., child support and other domestic support obligations, student loans except under rare circumstances, recent tax debt, and others), some debts may be found through litigation between the creditor and the filing debtor not to be dischargeable because of some shade of fraud involved in the incurring of the debt.

The variations listed in the Bankruptcy Code of “fraud” are numerous. Some are particular to very specific situations. For example, a breach of fiduciary duty of a building contractor with regard to the monies paid by homeowners for contracting work is a sort of “fraud” that can find the building contractor remaining liable to the homeowner after his or her bankruptcy for misuse of the homeowner’s money.

Others are more obvious, such as use of a credit card to buy loads of expensive merchandise very close to the date of the bankruptcy filing.

The provisions underpinning the Oregon decision are 11 USC 523(a)(2)(A), which makes not dischargeable debts obtained by misrepresentation and 11 USC 523(a)(2)(B), which makes not dischargeable debts incurred by way of a false written statement.

In the Oregon case, the Bankruptcy Court found simply that, because the debtor didn’t disclose all of the information requested by the state unemployment benefits provider in question and did not demonstrate any problem reading the application and did sign the application below a boiler-plate affirmation of the accuracy of the information provided in the application, the debtor had purposefully defrauded the State of Oregon.

This was, the Court held, fraud under Section (2)(A), above, because the misrepresentation alleged did implicate her financial condition (working or not working). It was also fraud under (2)(B), above, because all of this occurred in written form.

What Does This Mean for Michigan Bankruptcy Cases?

It means that there is no swell of support for a contrary point-of-view as to the Eastern District of Michigan’s view of non-dischargeability of debts for unemployment overpayments for which the State of Michigan Unemployment Agency has claimed an occurrence of fraud. This point-of-view is now enshrined at the level of the Sixth Circuit Court of Appeals, as appeals from the Bankruptcy Court have now failed.

Only, therefore, a decision of the US Supreme Court might alter the ability of Detroit-area bankruptcy debtors to have their unemployment overpayment debts to the State discharged, despite the fact that the entire world is now well aware that the vast majority of these “fraud” claims were the result of the defective determination of a computer program.

If you are considering filing for bankruptcy, Attorney John Hilla would be pleased to discuss your matter with you. Contact Us Here, or call (866) 674-2317. 

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