In re Loy
The debtor filed a petition for relief under Chapter 7 and subsequently received a discharge on May 20, 2017. Among his creditors was the Indiana Department of Workforce Development. The debtor's obligation to it was based on the Department's determination that he fraudulently misrepresented his employment status in order to obtain unemployment benefits. It had two components: $5,865 representing the overpayments themselves and $2,525.25 representing penalties for the fraudulent representations. After the case was closed, the court received a letter from the debtor, who is now proceeding pro se, asking that Department be held in civil contempt of court for violating the discharge injunction because it was seeking to collect on the pre-petition debt he owed it. The Department responded by acknowledging its collection efforts; but stated that those efforts were directed only to the penalty portion of the debt, and that it was not attempting to collect any portion of the overpayments. It argued that the penalty portion of the debt was non-dischargeable under § 523(a)(7) and so there was no violation of the discharge injunction. That is the question before the court, following a hearing held on the debtor's motion and the Department's response.
Broadly speaking, there are two categories of debt that are non-dischargeable under § 523. There are those that will be discharged unless, upon the timely request of the creditor, the bankruptcy court determines that they are excepted from discharge, and there are those that are automatically excepted from discharge without the need for any action in the bankruptcy court at all. See.
It should be noted that the elements Congress established for non-dischargeability in § 523(a)(7) -the conditions the Court reiterated in Kelly-focus only upon characteristics of the debt itself: Is it penal? Is it for the benefit of a governmental unit? And, is it something other than compensation for an actual pecuniary loss? They do not involve, ask the bankruptcy court to pass upon, or require
The obligation the Department was attempting to collect from the debtor satisfies all of the requirements of § 523(a)(7). It is penal in nature-although labels do not matter, it is called a "civil penalty"-imposed as a sanction for the knowing failure to disclose or knowing falsification of facts that would disqualify an individual from receiving unemployment benefits. See, I.C. 22-4-13-1.1(b). As an agency of the State of Indiana, see, I.C. 22-4.1-2-1, 22-4-18-1, the Department is a governmental unit. Finally, the amount in question, $2,525.25, is not compensation for the State's actual pecuniary loss but is in addition to that loss, calculated as a percentage of the payments the debtor wrongfully received because of his misconduct. As such, the penalty portion of the debtor's obligation to the Department is excepted from his discharge, even though his liability for the overpayments themselves has been discharged.
Since the Department's collection efforts were directed only to the non-dischargeable penalty portion of the debtor's obligation to it, its actions did not violate the discharge injunction. The debtor's motion for contempt will be DENIED. An order doing so will be entered.
Notes
The situation is somewhat different where the overpayment portion of the Department's claim is concerned. Although the validity of that debt is a matter of state law, its dischargeability is a matter of federal law. Grogan v. Garner,
The Department did not file a timely complaint to determine dischargeability for fraud, under § 523(a)(2).