Chapter 13 bankruptcy may not stop prosecution for fraudulent receipt of unemployment benefits.

A recent decision by Judge Cassling of the Northern District if Illinois Bankruptcy Court,  In re Dawn Marie Sori, bankruptcy case 12 B 01108,  finds that the Attorney General and the Illinois Department of Employment Security (IDES) did not violate the automatic stay provisions under the US Bankruptcy Code.

Specifically, the actions taken by the Attorney General and IDES are excepted from the automatic stay under 11 U.S.C. § 362(b)(1) and (b)(4).  The debtor received numerous payments of unemployment, which were later to be determined fraudulent.   The debtor filed for chapter 13 bankruptcy protection and sought to pay this debt back under her chapter 13 repayment plan, and IDES even filed a proof of claim in this case.

The attorney general filed a criminal complaint against the debtor in DuPage County, IL. An arrest warrant was issued, and the debtor surrendered, and was required to post a $1000 bond.  The debtor filed a motion for sanctions that these actions were a violation of the Automatic Stay protection that the debtor is entitled to, and requested damages pursuant to 11 U.S.C. § 362(k)(1) which provides a remedy for the debtor to recover her damages.

Judge Cassling, citing various caselaw, ruled that the actions were excepted under the exceptions to the automatic stay, 11 U.S.C. § 362(b)(1) "states that the filing of a petition does not operate as a stay “of the commencement or continuation of a criminal action or proceeding against the debtor[.]”  Further, Judge Cassling indicates the legislative history of that code section notes that "the bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension."

Judge Cassling further indicated, that the debtor did not meet it's burden, even when looking at the minority opinions when analyzing relevant case law.  Judge Cassling states "because the Debtor has failed to establish that either IDES or [Attorney General] acted in bad faith or that their primary motive was to collect a pre-petition debt, the Court finds that their actions are excepted from the automatic stay even under the narrower interpretation of § 362(b)(1).

The full opinion can be viewed here.  
http://www.ilnb.uscourts.gov/sites/default/files/opinions/33538_Sori%20stay%20violation-sanctions.pdf

So, while the IDES may play along with the bankruptcy, they don't have to, especially if the plan is not paying 100% to the unsecured creditors.   There is no guarantee that a debtor would complete a case.  I haven't seen any objections in chapter 7 cases in over 10 years, but it doesn't mean they cannot still proceed with criminal prosecution for fraud.