Madeleine Masterton, who received youth allowance payments while studying, and a second woman Deanna Amato are challenging the validity of the scheme- with the help of Victoria Legal Aid - after being hit with unexpected debts earlier this year.

On Friday, the DHS's legal team highlighted that Ms Masterton's $4000 debt had since been wiped, but sought further clarification on the women's case before handing over more documents pertaining to how the debt decisions are made.

"The Commonwealth has accepted, after we got helpful information from the applicant, ... [they] were wrong," Nicholas Owens SC said.

Despite admitting the error, DHS continues to play hard-ball tactics, calling for the two cases to go to separate trials.

"There ought to be a separation of the two matters," Mr Owens said.

In February, Victoria Legal Aid launched their test case on behalf of Ms Masterton, who received youth allowance payments while studying, amid claims that thousands of former welfare recipients may have been coerced into paying debts that were incorrect, or not owed at all.

Months later, Ms Masterton had her $4000 erased without notice, fuelling claims by social service advocates and legal experts that DHS backed down because its automated program cannot withstand legal scrutiny.

Then, in June, Victoria Legal Aid submitted a case for a second woman, council officer Deanna Amato, who says she only found out about her alleged Austudy allowance debt of $2754 when DHS issued a garnishee order against her tax return in January.

The contentious program, introduced by the Coalition government, calculates a former welfare recipient's debt by taking a fortnightly average rather than discovering the exact amount that was claimed.

Correspondence from DHS does not provide people with any explanation of how their debt was calculated. The government agency had also attracted critisism for its heavy-handed approach against those who fail to repay debts, including threats of compounding interest, garnishee of wages and seizure of money from bank accounts.

On Friday, Justice Jennifer Davies adjourned the case until September so both parties can obtain further information, labelling the matter "an unusual case".

"It's important to clarify if the heart of the issue is whether the debt created was one that could be lawfully created as distinct from whether or not the calculation was wrong," she said.

In May The Age and The Sydney Morning Herald revealed Centrelink had threatened to charge daily compounding interest, garnishee wages or seize funds from the bank accounts of former welfare recipients who failed to settle debts within 28 days.

It came as DHS conceded to a Senate estimates inquiry that more than 70,000 robo-debts had been reduced or erased completely. But the department denied the reduction or waiving of debts indicated there were flaws in the scheme.

The Federal Court will decide in September if Ms Masterton and Ms Amato's cases proceeds to trial.