Workers’ compensation settlements often reimburse just a fraction of the lost wages injured employees rely upon to meet their financial obligations, so it is not unusual for them to later seek bankruptcy protection. Because state law determines how workers’ compensation settlements are treated with regard to creditors and bankruptcy, the implications of filing for Chapter 13 relief after receiving a workers’ compensation settlement will vary from state to state. A bankruptcy lawyer in your state can advise you of the pros and cons of your particular situation.
Chapter 13 Bankruptcy
Chapter 13 of the U.S. Bankruptcy Code provides for adjustment of and repayment of debts. As a rule, filing for Chapter 13 relief stops, or provides an “automatic stay” of, collection actions, such as foreclosures against a debtor’s property, including a home, and allows the debtor to keep such property. This is the primary advantage of a Chapter 13 filing. The primary disadvantage is that the debtor will remain responsible for payment of certain debts.
Chapter 13 Plan
To qualify for Chapter 13 relief, a debtor must file and follow a repayment plan that provides for payment in full of all priority debts, such as taxes and the fees related to the bankruptcy proceeding, and all secured debts, such as car loans. Any disposable income left over after living expenses and payment of priority and secured claims will be distributed by a bankruptcy trustee for repayment of unsecured debts. After the Chapter 13 plan is successfully completed, the debtor will be discharged from any remaining eligible debts.
To support a proposed Chapter 13 plan, a debtor must file schedules showing current income and living expenses, as well as list all assets and financial obligations. The debtor must prove to the bankruptcy court that there is sufficient regular income left over after meeting his living expenses to pay all priority and secured claims in full within the period of the repayment plan, which is usually from three to five years. In many cases, workers’ compensation benefits alone are not sufficient for funding a Chapter 13 plan.
For employees who are temporarily or permanently disabled due to work-related injuries, state workers’ compensation laws typically provide for wage-related compensation equal to some fraction of the worker’s average weekly wage, often two-thirds, and subject to a weekly maximum. The worker may elect to receive these periodic payments throughout the period of disability, or may instead negotiate an up-front, lump-sum compensation settlement. If a worker elects to continue receiving periodic workers’ compensation payments, those continuing benefits may be considered in many states as regular income for the purposes of funding a Chapter 13 repayment plan. If a worker has instead entered a one-time, lump-sum workers’ compensation settlement prior to filing for Chapter 13 protection, it is less likely the settlement will be considered as regular income for the purposes of the plan.
Workers’ compensation benefits or settlements may also be exempted by the laws of most states; therefore, not included as assets of bankruptcy estates subject to claim by the trustee or creditors. However, because exemption from seizure is, in most instances, a matter of state law, debtors must look to the laws of their particular home states to verify whether their specific settlements are exempt.
Chapter 7 Bankruptcy
If the laws of a debtor’s home state exempt workers’ compensation benefits or settlements from seizure by creditors and the bankruptcy estate, it may be more advantageous to file for protection under Chapter 7 of the Bankruptcy Code, assuming there are no other significant assets that require the peculiar protections of Chapter 13. Chapter 7 allows the debtor to keep all exempt property, while granting an up-front discharge of eligible debts shortly after filing, without requiring additional payments over the period of a subsequent plan.