Does a Bankruptcy Affect Workers’ Compensation Benefits?

Does a Bankruptcy Affect Workers’ Compensation Benefits?

This is a very simple question that arises in our cases from time to time. But since the beginning of the recession in December 2007, with the increases in foreclosures, and with unprecedented unemployment the question is bound to come up more often. In many cases, workers’ compensation benefits are the only asset a person has.

So on a recent day, a client came to the office to discuss her case and the one thing foremost on her mind was the question about whether her filing of bankruptcy under a Chapter 7 liquidation would affect her workers’ compensation case. She works as an administrative assistant for a school district and was receiving permanent disability advances after recovering from a knee replacement. She was divorced, living alone, paying rent and living from pay check to pay check with less than $100.00 in savings. She was in debt up to her ears from credit card usage and from paying over 80% of her disposable income on rent (instead of paying the recommended 33% of net income on housing).

The first knee jerk response any workers’ compensation attorney would have is that there is no effect of a bankruptcy on a client’s workers’ compensation case at all. However, if you are asked for some legal authority to support your conclusion, how many of you really know the correct legal answer? We thought so. Don’t feel so bad, you are not alone. Here’s your answer and you can, er, take it to the bank . . .

Title II of the U.S. Bankruptcy Code allows each state to opt in or opt out of the debtor-creditor exemption laws embedded in the Bankruptcy Code and for each state to adopt its own debtor-creditor laws. California is one such state that elected to opt out of the federal debtor-creditor laws and adopt its own claims of exemptions. The California Code of Civil Procedure, section 703.140 governs claims of exemption between creditors and debtors.

Pertinent parts of section 703.140 state as follows:

“(a) In a case under Title II of the United States Code all of the exemptions provided by this chapter, including the homestead exemption, other than the provisions of subdivision (b) are applicable regardless of whether there is a money judgment against the debtor, or whether a money judgment is being enforced by execution sale, or any other procedure, but the exemptions provided by subdivision b may be elected in lieu of all other exemptions provided by this chapter, as follows:

(b) The following exemptions may be elected as provided in subdivision (a):

(1) . . . (9)

(10) The debtor’s right to receive any of the following:

(A) A social security benefit, unemployment compensation, or a local public assistance benefit.

(B) A veteran’s benefit

(C) A disability, illness of unemployment benefit”

California Code of Civil Procedure section 704.160 states in pertinent part as follows:

“(a) Except as provided by Chapter 1 (commencing with section 4900) of Part 3 of Division 4 of the Labor Code, before payment, a claim for workers compensation or workers’ compensation awarded or adjudged is exempt without making a claim. Except as specified in subdivision b, after payment, the award is exempt.

(b) Notwithstanding any other provision of law, during the payment of Workers’ compensation temporary disability benefits described in sub-division (a) to a support judgment debtor, the support judgment creditor may, through the appropriate local child support agency, seek to apply the workers’ compensation temporary disability benefit payment to satisfy the support judgment as provided by Section 17404 of the Family Code….”

This is the only authority you need to show that any workers’ compensation benefits are exempt from Bankruptcy proceedings, regardless of whether the benefits are being paid voluntarily by a claims administrator or as a result of an order from the WCAB via a Stipulated Award, Findings and Award or a Compromise and Release agreement.

The only exception is under CCP section 704.160(b) that covers claims for child support liens against workers’ compensation benefits in which case a bankruptcy proceeding preserves creditor rights against those benefits in connection with enforcement under a family law proceeding.

Otherwise, workers’ compensation benefits are not considered an asset of the person who has filed for bankruptcy protection, even under a full Chapter 7 liquidation proceeding. The bankruptcy attorney may list weekly workers’ compensation benefits in the bankruptcy forms or a settlement amount but the attorney would list those amounts as exempt under state debtor-creditor laws.

 © Copyright 2010 Robert G. Rassp. All rights reserved.


Robert G. Rassp, Esq.
  • 01-27-2010

Be wary, however, of the need to list a pending comp claim as an asset, albeit an exempt one, in the bankruptcy petition.  Under the Longshore Act -- where the post's point about the comp benefits being exempt from inclusion in the bankruptcy estate is guaranteed by specific provision of federal law (33 U.S.C. 916) -- employers have convinced ALJs in two cases that the claimant is estopped from pursuing the comp claim after having omitted it from the schedule of assets on the basis of which the claimant''s debts were discharged.  In one case, the ALJ dismissed the claim despite the bankruptcy trustee''s confirmation that the estate would have had no interest in the pending Longshore Act claim if it had been listed (which is a point of clear law anyway); the case is under appellate review.