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Bankruptcy and Workers’ Compensation Benefits

Thinking about bankruptcy? If you have been injured at work and are receiving workers compensation benefits then you may be wondering how filing bankruptcy will affect your benefits. The short answer is that your ability to collect workers’ compensation benefits will be unaffected by bankruptcy.

When you file for bankruptcy, a court will determine which of your assets should be included in the “bankruptcy estate” and which assets should be excluded. The bankruptcy estate will be used to pay creditors. Workers’ compensation benefits are excluded from the bankruptcy estate because they fall under the exempt category of “future earnings.” Future earning are not assignable and are not subject to attachment, garnishment or execution which means that the right to get this property (the benefits) cannot be taken away from the employee and cannot be transferred to a third party.

The general rule that workers’ compensation benefits are not part of the bankruptcy estate is straightforward, but what if you claim is still pending when you file for bankruptcy? In that case, there are different issues that arise. When a person files for bankruptcy, an automatic stay comes into effect. The automatic stay prohibits proceedings against the worker. In other words, it stops parties, including an employer, from making a claim that they are owed money by the debtor. By temporarily stopping creditors from making a claim against the employee the court has time to sort out the debtor’s assets and liabilities.

If an employee’s workers’ compensation claim is pending when they file for bankruptcy then the automatic stay could prevent an employer or an insurance company from raising a counterclaim in the case. A counterclaim could be considered a claim against the worker and be prohibited by the automatic stay. If the insurer or employer is merely raising a defense then, arguably, it is not an affirmative act and therefore is probably not considered a proceeding against the employee.

If the employer is making a claim to recoup benefits that have been over-paid to the employee then it can be argued that the funds that they want to recover are not subject to the automatic stay rule because those funds do not belong to the debtor. Since the money was an alleged overpayment, those funds never belonged to the employee/debtor and he or she has not legal claim to them.

There are two general caveats that a debtor should be aware of. First, an employer may ask the court for relief from the automatic stay, so they may get the right to proceed against the employee. Also, the language of the statute suggests that an employer can start a proceeding against the employee after the filing of the bankruptcy petition as long as it is before the debt has been discharged. Therefore, the debtor should not assume that when they file for bankruptcy they are protected from any claims against them.

The decision to declare bankruptcy is one that is not made lightly. There are numerous considerations that need to be made. There are federal and state legal aspects to bankruptcy. State law may provide exemptions from the bankruptcy estate that federal law does not provide. A person who is seriously contemplating bankruptcy should consult with an attorney to find out how bankruptcy would work in their particular circumstances.

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