If someone in North Carolina got welfare benefits by lying on the application and then files for bankruptcy, does the bankruptcy wipe out the county's claim to be paid back, or does the county still have a route to recover the money?

Plain-English summary

North Carolina's Secretary of Human Resources asked whether bankruptcy discharged repayment liability for public assistance obtained through fraud or misrepresentation. The 1981 Attorney General answered no if the county department of social services properly presented its claim.

The opinion identified three situations. A pre-bankruptcy judgment determining that assistance was obtained through fraud, deceit, or misrepresentation would not be discharged, it said. A debt not yet reduced to judgment for money obtained by false pretenses, false representations, actual fraud, or a materially false written financial statement made with intent to deceive and relied on by the agency also could avoid discharge under the procedure cited in 11 U.S.C. § 523(c) and Bankruptcy Rule 409. A fine, penalty, or forfeiture payable to a government unit was not discharged under the quoted § 523(a)(7) rule if it was not compensation for pecuniary loss.

The opinion did not say that an ordinary pre-petition judgment survives bankruptcy unless a court rules otherwise. Its first category specifically required a judgment determining fraud, deceit, or misrepresentation. The AG recommended that county social-services departments consult their attorneys before asserting or collecting these claims in bankruptcy.

Currency note

This opinion was issued in 1981 under the bankruptcy provisions it cites. Check current federal bankruptcy law and procedure before relying on it for a present claim.

What this means for you

County social-services staff. The opinion conditions its no-discharge answer on properly presenting the claim. Its advice is to consult an attorney before asserting or collecting from a recipient in bankruptcy.

Debtors and counsel. The opinion's judgment discussion concerns a prior judgment that determined assistance was obtained through fraud, deceit, or misrepresentation. It gives no blanket rule for ordinary judgments or nonfraud overpayments.

Common questions

Does every pre-bankruptcy judgment for a county survive discharge?

The opinion does not say that. It specifically describes a judgment determining fraud, deceit, or misrepresentation in obtaining public assistance.

What if the county has no judgment yet?

The opinion identifies a possible nondischargeable debt where money was obtained through the specified fraud or false-statement conduct. It refers to 11 U.S.C. § 523(c) and Bankruptcy Rule 409 for procedure, without laying out a full filing checklist.

Did the AG address an innocent overpayment?

No. The question and answer concern fraud or misrepresentation, and the opinion supplies no conclusion about a routine error without those facts.

What did the AG advise county departments to do?

It recommended consulting their attorneys before trying to assert or collect claims against recipients who had filed bankruptcy.

Background and statutory framework

The opinion distinguishes a fraud-based judgment entered before bankruptcy, a fraud-based debt not yet reduced to judgment, and a qualifying government fine or penalty. It cites 11 U.S.C. § 523(c) and Bankruptcy Rule 409 for the unjudged fraud claim and § 523(a)(7) for a penalty or forfeiture that is not compensation for a pecuniary loss. The county's proper presentation of its claim is a condition in the AG's conclusion.

Citations

• 11 U.S.C. § 523(c)
• 11 U.S.C. § 523(a)(7)
• Bankruptcy Rule 409

Source

• Landing page: https://ncdoj.gov/opinions/impact-of-bankruptcy-on-county-claims-for-welfare-payments-made/

Original opinion text

Requested By: Dr. Sarah T. Morrow Secretary of Human Resources

Question: Will bankruptcy of a person who obtained public assistance through fraud or misrepresentation discharge such a person's liability for repayment?

Conclusion: No, if the county department of social services properly presents its claim.

Where judgment, determining that public assistance was obtained by virtue of fraud, deceit or misrepresentation, is entered prior to filing of the petition in bankruptcy, the judgment will not be discharged. 11 U.S.C.A. § 423, Note 412.

A debt, not reduced to judgment, arising from the debtor having obtained money, property or services by false pretenses, false representations, or actual fraud or through use of a materially false written statement of the debtor's financial condition, which he made with intent to deceive and on which the agency relied in granting benefits, will not be discharged in bankruptcy court that the debt is not dischargeable appear in 11 U.S.C. § 523(c) and Bankruptcy Rule 409.

A fine, penalty or forfeiture payable to or on behalf of a governmental unit is not discharged if the fine, penalty or forfeiture is not compensation for pecuniary loss. 11 U.S.C. § 523(a)(7).

It is recommended that county departments of social services consult their attorneys before attempting to assert or collect claims against public assistance recipients who have filed bankruptcy proceedings.

Rufus L. Edmisten
Attorney General

Henry T. Rosser
Assistant Attorney General