Does Bankruptcy Protect a Workers’ Comp Settlement?

Bankruptcy may be necessary to alleviate your financial burdens and obtain a fresh start. If you have received a Workers’ Compensation settlement or are in the process of negotiating one, you should talk to your attorney about how to protect your settlement during bankruptcy proceedings.

Workers’ Compensation benefits and settlements are usually protected from bankruptcy, but you must navigate the appropriate legal channels. You can exclude a Workers’ Comp settlement from bankruptcy by claiming the right state or federal exemptions. However, what you do with these funds might place them at risk. Avoid comingling funds from a Workers’ Compensation settlement, as they may lose their protected status. Also, be careful about spending these funds, as what you purchase may not be exempt.

Get a private, free case evaluation from our bankruptcy lawyers by calling us at Young, Marr, Mallis & Associates at (215) 701-6519.

Protecting Workers’ Comp Settlements Through Bankruptcy Exemptions

If you were injured at work, you may have accepted a Workers’ Compensation settlement to help you make ends meet while you recover. If you are also going through bankruptcy, your Workers’ Comp settlement may be in jeopardy.

Federal Exemptions

Bankruptcy exemptions allow you to shield certain funds, assets, or accounts from the bankruptcy process, meaning a bankruptcy trustee cannot seize certain assets to pay your debts.

Under federal law, bankruptcy exemptions may protect a wide range of assets, accounts, and property, including public benefits or government assistance. Workers’ Compensation falls under this category, and you can exempt it from bankruptcy proceedings.

State Exemptions

In addition to federal exemptions, state exemptions may shield certain assets. While federal and state exemptions often overlap, there may be key differences that you should discuss with your lawyer.

If your state provides exemptions for public assistance or benefits, including Workers’ Compensation settlements, you may think about selecting these exemptions. However, you should carefully consider the state and federal exemptions before making a final decision.

Selecting Optimal Exemptions

Depending on what state you live in, you may only be permitted to select entirely federal or entirely state exemptions. Federal law provides exemptions that may protect your Workers’ Compensation settlement, but not every state offers the same.

It is crucial that you speak to an attorney about your case to determine if state exemptions adequately protect you or if you should only select federal exemptions.

Possible Risks to Your Workers’ Compensation Settlement During Bankruptcy

Even if you can claim exemptions that would protect your Workers’ Comp settlement, what you do with the settlement might still place it at risk during bankruptcy proceedings.

Mixing Funds

When you receive a Workers’ Compensation settlement, you might not give much thought to what kind of account you put it in. Since most people need these settlements to cover ordinary expenses, they may deposit them into the accounts they normally use. However, if you comingle Workers’ Compensation settlement funds with other money, your settlement could lose its protected status.

It may be best to keep any settlement proceeds completely separate from other money and accounts. Doing so may help ensure its protection during bankruptcy proceedings.

Spending Your Workers’ Comp Settlement

While your Workers’ Compensation settlement is shielded from bankruptcy under the right circumstances, what you purchase with the settlement funds might not be. For example, if you spend that money on car payments or a mortgage, your vehicle or home could still be seized by bankruptcy and liquidated to pay your debts, depending on which bankruptcy chapter you file under.

Spend the money wisely. If you receive the settlement while in the middle of bankruptcy proceedings, it might be wise to spend as little as possible to protect the money until your bankruptcy case is completed.

Pending Workers’ Compensation Claims

You might be going through bankruptcy while your Workers’ Compensation case is pending. This can be a legally complex situation, and your potential settlement might not be protected since you technically do not have it yet.

It is crucial that you disclose the settlement, whether you have received it or not, to the bankruptcy court. Disclosing the full extent of your assets is required, and to do otherwise may be seen as fraud.

Although Workers’ Compensation settlements are exempt from bankruptcy, they are still considered income, which is an enormous factor in bankruptcy proceedings. Failing to inform the court of a potential settlement is not a good idea.

FAQs About Bankruptcy and Workers’ Compensation Settlements

Will You Lose a Workers’ Comp Settlement During Bankruptcy?

Your Workers’ Compensation settlement may be at risk during bankruptcy proceedings if you do not claim the appropriate exemptions. Federal exemptions protect public assistance or benefits, such as Workers’ Compensation, but state exemptions may vary. Depending on where you live, you may be able to choose only federal or state exemptions, not both.

What Can You Do to Protect Your Workers’ Compensation Settlement During Bankruptcy?

First, you should talk to your lawyer about selecting the right bankruptcy exemptions. If you play your cards right, you may completely exempt your Workers’ Compensation settlement from bankruptcy. Even if your settlement is pending, you must still disclose it to the court. To do otherwise may be considered fraud and could land you in serious trouble.

What Should You Do with Your Workers’ Comp Settlement During Bankruptcy?

Avoid mixing funds from a Workers’ Comp settlement with other funds. For example, do not deposit your settlement funds in the same account that your spouse deposits their normal income. This could cost your Workers’ Comp settlement its protected status.

You should also be careful about how you spend the money from your settlement. While the settlement might be protected, what you buy with it might not be.

Do You Have to Use a Workers’ Comp Settlement to Pay for Bankruptcy?

Possibly. Your settlement may be exempt from bankruptcy, but it will still be considered income. Although we can protect it from a bankruptcy trustee, you might still end up using the settlement to pay for a Chapter 13 payment plan if that is how you file.

Receive Help from Our Bankruptcy Lawyers Today

Get a private, free case evaluation from our bankruptcy lawyers by calling us at Young, Marr, Mallis & Associates at (215) 701-6519.