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ISSUE DATE: 07/2015

Immediately discontinue all recovery actions against a person who the agency learns has filed a Chapter 7 or Chapter 13 bankruptcy action or has been granted a discharge. Notification to affected creditors only needs to be near and constructive, a legal term that does not demand direct notice or proof of notice to enforce the automatic stay from all recovery actions as a result of the filing or discharge. Once the bankruptcy petition is filed, an automatic stay is in place that stops lawsuits, foreclosures, garnishments, certified state or federal revenue intercepts and all other collection activity and contact with the debtor. However, agencies may continue recoupment against an assistance unit if 1 or more members responsible for that debt are not part of the bankruptcy action.

As soon as your agency becomes aware of a bankruptcy related action involving one of its debtors, refer the matter to your county attorney or another person designated to evaluate options for responding to bankruptcy matters.

To have any standing with respect to considering a debt for exception to discharge or to be included in a distribution of assets, your agency must formally respond to bankruptcy court. In Chapter 7 proceedings, this may consist of filing a proof of claim, if not included in the list of debts or petitioning the bankruptcy court in an adversarial proceeding with documentation supporting the non-dischargeable basis of your agency’s debt. In Chapter 13 proceedings, responding may consist of sending in a proof of claim and, as appropriate, attending the meeting of creditors to be considered for any repayment against the debt from income and assets that are not reserved for higher priority payments.

In bankruptcy filings, public assistance debts are classified as unsecured/non-priority claims and are routinely discharged because these debts are rarely covered in any distribution of available debtor assets. Agencies cannot require the debtor to amend the filing as a condition for stopping recovery actions or refunding payments received after the filing or discharge. Agencies may file their own Proof of Claim with the bankruptcy court and not rely on the debtor to list it. The Proof of Claim form is a standard form available through the United States Bankruptcy Court website. An attorney is not required to complete or certify a debt on the Proof of Claim form.

An exception to having unsecured debts discharged is to establish that the debt falls within the meaning of the bankruptcy court definition of fraud or misrepresentation. The bankruptcy definition of fraud is broader and does not necessarily require proof of intent. When objecting to discharge based on fraud, your agency must file a lawsuit (adversarial proceeding) with the bankruptcy court that includes all the background information and basis for why the debt was incurred fraudulently. For cases involving public assistance debt that was adjudicated through the administrative disqualification hearing (ADH) process, the objection would be fairly straightforward using the information obtained to support the ADH fraud determination. Certain debts incurred as a result of client error such as failing to report information, could also be pursued as an exception to discharge based on the fraud bankruptcy definition. Debts and fines relating to restitution orders as a result of formally adjudicated criminal court convictions are non-dischargeable without having to file an objection to discharge with the bankruptcy court.

Absent an order from the bankruptcy court that a debt is not discharged, any unsecured debt established against the debtor prior to the bankruptcy filing date is considered discharged and must be written off pursuant to the claims termination policy found in 0025.12.03.09 (Claim Compromise & Termination). This holds true whether or not your agency was a participant or had been given timely notice in the bankruptcy process. The discharge of debts only covers debts incurred prior to the date the bankruptcy petition was filed. Debts established after the bankruptcy filing date are not dischargeable.

Agencies believing that they would have sought an exception had they been properly notified of the bankruptcy should consult with their county attorney. This situation would most likely require your agency initiating a formal action with the bankruptcy court and debtor to show how the agency was prejudiced by the failure to be notified.

When the court determines that an agency's debt is non-dischargeable or the bankruptcy action is dismissed without granting a discharge, resume recovery actions against that person.

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