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Sixth Circuit Suggests Zero Tolerance for Penalties Incurred In Connection with Fraud

On May 29, 2018, the Sixth Circuit Court of Appeals ruled that penalties and fines incurred in connection with fraudulently obtained unemployment benefits are non-dischargeable in Chapter 13 cases.  In Andrews v. Michigan Unemployment Insurance Agency and Kozlowski v. Michigan Unemployment Insurance Agency, case nos. 16-2383/2680 (6th Cir. 2018), the debtors received unemployment benefits from the State of Michigan, but failed to advise that they were also receiving income from employment.  The debtors were assessed fines on the grounds that they fraudulent obtained benefits from the state, and filed for Chapter 13 bankruptcies thereafter. 

The Sixth Circuit held that these fines were non-dischargeable because the debts were incurred under false pretenses, false representation or actual fraud.   Consumer debtors should take note that under this analysis, any debt arising from fraud may be found non-dischargeable in a Chapter 13 proceeding, regardless of narrow exceptions that may be carved out under other sections of the Bankruptcy Code.