IS MONEY FROM WORKERS’ COMPENSATION EXEMPT IN BANKRUPTCY

Let's say that you injured yourself because of your work. After some time, it is determined that you are entitled to receive $200,000 for your workmen’s compensation claim. But since you have been disabled because of the injury, you have not been able to work for the last 3 years. You racked up $80,000 of credit card debt because you had no income. You decide to file for Chapter 7 bankruptcy relief to get rid of your credit card debt of $80,000. What happens to the $200,000 that you have coming from your workmen’s compensation claim. Will the trustee get the $200,000 and use that to pay your $80,000 of credit card debt? Or, will you be able to keep the $200,000 while discharging your $80,000 of credit card debt? This is an interesting question, indeed.

Certainly, the trustee will try to get the $200,000. But will he succeed? If you are in this kind of situation, you can rely on Section 522(d)(11)(E) of the bankruptcy code. That section exempts “The debtor’s right to receive, or property that is traceable to (E) a payment in compensation of loss of future earnings of the debtor or an individual of whom the debtor is or was a dependent, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”

In Re Holstine, the Chapter 7 debtor claimed that his workers’ compensation redemption payment of $138,000 was exempt under Section 522(d)(11)(E). The trustee objected to the claim of exemption. But the court found the workers’ compensation redemption award was traceable to a payment in compensation of loss of his future earnings. Therefore, the award could be exempted to the extent it was reasonably necessary for the support of the debtor and his wife. The debtor testified that he was permanently disabled, that the award was the present value of his future earnings, and that he and his wife were using this workers’ compensation award to pay for their living expenses. The court found no basis for forbidding the debtor from exempting the entire lump sum payment.

The trustee then asked the court for a stay pending appeal, and asked the court to prohibit TCF National Bank from allowing the cash in the debtor’s account to be diminished in any amount less than $70,000. The trustee did not contest the court’s findings of fact, but raised a legal issue that workers’ compensation payments are not protected by Section 522(d)(11)(E). According to the trustee, Mr. big fat Meanie, this section protected only tort claims. While there is case law supporting the trustee’s position, the court noted that those cases were decided in the context of whether to exempt a worker’ compensation award under the more generous exemption provisions of Section 522(d)(10)) or the more restrictive provisions of 522(d)(11)(E). Section 522(d)(10) exempts “The debtor’s right to receive…© a disability, illness, or unemployment benefit." These cases were also decided before In Re Sanchez, where the court found that debtors may exempt a lump sum workers’ compensation redemption under Section 522(d)(11)(E) as longs as: (1) the payment is traceable to a payment in compensation of loss of future earnings of the debtor; and (2) only to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. Given the very detailed and careful analysis of both prior case law and legislative history in Sanchez, the court in this case was confident that its reliance on that conclusion was sound. Consequently, the court found little likelihood that the trustee would be successful on appeal. The court also noted that if it issued the stay, the debtors would be deprived of money they needed to pay their necessary living expenses. Therefore, the equities favored denying the stay.

The extent reasonably necessary for the support of debtor or his dependent is a flexible standard that takes into consideration the personal circumstances of the debtor. A debtor with substantial income from somewhere else may not need the award for support.