The Department of Human Services has wiped a $4000 debt at the centre of a Federal Court challenge to Centrelink's 'robo-debt' recovery scheme.

The decision to erase the entire debt incurred by Melbourne nurse Madeleine Masterton has fuelled claims by social service advocates and legal experts that the DHS was forced to back down because its automated program cannot withstand legal scrutiny.

The $4000 debt was at the centre of a Federal Court challenge to Centrelink's 'robo-debt' recovery scheme. Credit:AAP

Victoria Legal Aid had launched the test case on behalf of Ms Masterton in February amid claims that thousands of former welfare recipients had been coerced into paying debts that were incorrect, or not owed at all.

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.