Centrelink may have breached its duty of care, according to the Australian Lawyers Alliance.
If Centrelink is found to have breached its duty of care, those people wrongly issued debt notices may have grounds to sue the social service, Australian Lawyers Alliance spokesperson Greg Barns told SBS News.
"There may be a cause of action available to people," Mr Barns said.
"We've seen in the past, in relation to banks and financial institutions, where wrong information and penalties are applied, individuals are entitled to recoup those losses. I don't see why it would be different for Centrelink."
Centrelink has been under scrutiny after issuing 169,000 "debt letters" to welfare recipients.
Some welfare recipients said they had been unfairly targeted, as the government's former digital transformation chief, Paul Shetler, claimed the automated system used to determine the alleged debts was highly flawed.
The system, which was designed to match people’s reported income to Centrelink and the Australian Tax Office records, does not use accurate algorithms, he told Guardian Australia.
"The way they did it, obviously it's dangerous, because their algorithms are flawed in the first place," he said.
“Secondly, you have to be careful with data. Much of the data that’s in the federal government, how good is it really? There is this sort of a blind faith in data.”
Greg Barns said that if these allegations were true, Centrelink may have breached its legal duty of care to its customers, as stipulated in the 2013 Public Governance, Performance and Accountability Act.
It may then have to compensate those who have been affected.
"The Australian government's own guide to social security laws says Centrelink and all government agencies have a duty of care to provide accurate information and advice to individuals," Mr Barns said.
"If a person suffers a financial loss as a result of that, they may have a cause of action."
Melbourne resident Rahmona Goodchester told SBS News she received a letter just before Christmas telling her she owed more than $3500 in back-pay and rent assistance.
"It was a bit of a shock because I had already handed my lease in stating that I was already paying rent, that I was following the rules, that I had done everything they’d asked me to do and this was the second time I’d received a letter from Centrelink saying I owed them money when I didn’t," she said.
"I called them just after I received the letter and they stated that there was nothing they could do that I had to get another copy of the lease and take it in because they had no proof that I was even renting for the period of time that they’re saying I owed the money for."
Ms Goodchester said it was stressful trying to track down the lease agreement, which had been signed more than a year ago and ended about four months ago.
A second call to Centrelink appeared to sort out the problem, with staff telling her an error in the computer was the cause for the mistaken debt, but the damage was already done.
"I already suffer from mental disorders - I suffer from post-traumatic stress disorder from childhood abuse - so having a debt thrown on top of that, on top of the fact that I’ve just moved as well, and various other difficulties in life at the moment, it just makes everything so much harder to handle," she said.
"It’s impossible to comprehend how you’re going to be able to pay back that amount of money in such a short amount of time."
She said Centrelink "definitely needs a major overhaul" to prevent something like this happening again.
"For some people - especially people like myself who do struggle to find work, who constantly is looking for work and is unable to find work at the moment - Centrelink is our only income, so having Centrelink calling us up, telling us that we owe them money for something that we haven’t even done wrong because we’ve done everything right in order to prevent something like this from happening, it just makes everything so much harder than it needs to be," she said.
Social Services Minister Christian Porter has continued to defend Centrelink's debt recovery system, saying that the department had only received a small number of complaints.
The Ombudsman's office said it had sought more information from Centrelink and had commenced an investigation into the issue.