For a year after superstorm Sandy, Valerie Conlin lived on the second floor of her flooded Long Island home, cooking meals in her microwave while she ripped out her ground floor, gutted walls, replaced appliances and furniture, and installed new electrical, heating and hot-water systems.

Ms. Conlin, who is 58 years old and earns $40,800 as a hospital clerical worker, said she scraped together money from such sources as flood insurance, family and the Federal Emergency Management Agency to help fund the work, which is nearly finished two years later.

Then this fall, she received a letter from FEMA: The entire $17,800 government grant she received, which funded a third of the work, had been a mistake because it duplicated assistance provided by her insurance. She had 30 days to give the money back—or start paying penalties.

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