By Kitty J. Lin
If you received a notice from the California Employment Development Department (EDD) with a bill attached indicating you owe money to the state, you are not alone. Many Californians are issued overpayment notices. To add insult to injury, there are plenty of instances where the overpayment is not your fault. The EDD may have simply incorrectly calculated the amount to pay you and now they want their money back – with interest and penalties. It does not matter that the overpayment was not your fault; you may still be penalized for it. So what can you do about this overpayment? It depends on the circumstances of your case. EDD overpayments can be discharged in bankruptcy.
There are a few things you can try first before seeking the advice of a bankruptcy attorney to file bankruptcy and discharge the EDD overpayment. You can appeal the overpayment if it is within the window of time in which you may do so. If it is past the time where you can appeal or you lost the appeal and you do not have any other debts and the EDD overpayment is a manageable amount then you can try to negotiate or work out a payment schedule with the EDD.
If you have other debts in addition to the overpayment from the EDD you may consider bankruptcy as an option. You should consult with a bankruptcy lawyer regarding your situation as the answer always depends on your specific circumstances. If you qualify for Chapter 7 bankruptcy the EDD overpayments are dischargeable along with your other general unsecured debts. If you choose to file a Chapter 13 bankruptcy the EDD overpayments will be treated the same as your other general unsecured creditors. Depending upon your circumstances you may not be paying anything back to general unsecured creditors and the alleged EDD overpayment will be discharged upon completion of the Chapter 13 plan. The dischargeability of your EDD overpayments are dependent on whether there was fraud involved in the accrual of the overpayment. If there was allegedly fraud involved the discharge of the EDD overpayments can be denied pursuant to 11 U.S.C. §523 if the California Employment Development Department files an adversary proceeding and proves the overpayment was due to fraud.
California’s Unemployment Insurance Code §2736 states that in the absence of fraud, misrepresentation or willful nondisclosure, EDD must mail the overpayment notification to the recipient of the unemployment benefits within 2 years after the beginning of the benefit period where the overpayment was made. If there is fraud involved California’s Code of Civil Procedure §338(d) provides for a three-year statute of limitations. The clock starts when the cause of action is discovered (or should have been discovered) by the aggrieved party (in this case, the EDD), of the facts constituting the fraud or mistake. If the EDD knew, or should have known, about the facts constituting fraud for more than three years and they did nothing about it then they can no longer go after the recipient. Statutes of limitations are set up so that the aggrieved party can pursue their rights in a timely manner. If they sleep on their rights they will lose them. It goes with the saying, “You snooze, you lose.” There are time limits set up because the longer the time passes, the harder it is to remember detailed information that may help or hinder the case, witnesses may no longer be able to remember or may no longer be present to provide testimony and records may be destroyed. Therefore it is imperative to move on your rights as soon as you know you have been wronged.
If it has been more than three years since the alleged overpayment has occurred and the EDD has not charged you with fraud then they will not be able to bring fraud up as an exception to your bankruptcy discharge should you decide to file for bankruptcy. There are several issues you may want to be aware of when discharging your EDD overpayments in bankruptcy. The first issue is the offsetting of your tax refund. If the EDD has placed a lien and forwarded information to the taxing authorities to have your refund withheld to pay back the overpayment, you want to be sure the overpayments are discharged in bankruptcy prior to your filing your tax returns. If you file your tax returns after your bankruptcy case has started but before receiving a discharge your tax refunds may still be withheld to pay the pre-petition debt (your overpayment). Before filing your tax return you should contact the taxing authorities to verify the debt has been discharged. If it has not, or even if there is a question about it, you should apply for an extension to file your taxes.
Another issue is the recoupment of the overpayment. Recoupment is when the EDD withholds your unemployment benefits to pay the overpayment that is discharged through bankruptcy. They can do this only if you are currently collecting unemployment and you try to discharge the overpayment in your bankruptcy case. The recoupment and the overpayment have to arise from the same action. If you are not on unemployment when you file your bankruptcy case and your overpayment is discharged through bankruptcy, the EDD cannot recoup those funds from you when you apply for the benefits in the future since those debts were discharged in your bankruptcy case and trying to collect on it is a discharge violation. This matter is not settled, however, so you should contact a bankruptcy attorney to discuss your situation.