Can I file bankruptcy on worker’s compensation overpayment claims?

Maybe, but you’ll probably get sued in bankruptcy and still be required to pay those debts.

If the Department of Workforce Services is coming after you for overpayment of unemployment or disability benefits, bankruptcy may actually help you.  Those debts are dischargeable in bankruptcy.

The problem arises when Workforce Services threatens to, or does in fact, file an adversary proceeding to determine that the debt is nondischargeable.  They will claim that your overpayment was based on fraud, and most likely they will win.

So, you’re then left with a choice:  you can fight the adversary proceeding or simply pay the debt.  Here in Utah, Workforce Services will see that you’ve listed them in the bankruptcy.  They always come to the 341 Meeting of Creditors.  After the meeting they’ll meet us in the hallway and give us a choice:  1.  reaffirm the debt for the current amount you owe with no interest rate and no specified repayment plan, or 2.  fight the adversary proceeding they will file in a couple of weeks.

When they file the adversary proceeding, they will tack on at least $500 in attorney’s fees in addition to the amount you already owe.  If you try to fight it, your attorney will charge an additional retainer for the adversary proceeding, and he’ll bill you on an hourly basis, because now you are involved in litigation as opposed to a flat fee bankruptcy.  Basically, it’s a mess.

There is no good answer, and in most cases, I advise my clients to sign the reaffirmation agreement because it is much, much cheaper than fighting it, and there is usually a very high probability that we will lose that fight.

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