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Are your workers' compensation benefits exempt from creditors if you file for bankruptcy?
By Hermin Dowe, Esq.

Your workers’ compensation benefits are finally awarded. It’s a relief to have some significant income, even if it’s only a fraction of what you’d be making if you were still working. The relief is short-lived, though. The calls from collection agencies soon remind you of your massive credit card debt. You want to file for Chapter 7 liquidation. But can creditors take your workers' compensation money?

An injury sustained during the course of employment has the potential to disturb your life drastically. Aside from the physiological and psychological effects of the injury, you are also faced with a sudden reduction in income. If your injury is minor and you are able to return to work quickly, then you will be able to handle the reduction without much of a problem. If, however, you sustain a more severe injury, then prolonged absence from work can have a dramatic and lasting effect on your financial state of affairs.

“What about workers’ compensation?” you may ask. That system is not as simple and straightforward as one would like to believe. If it were, then more employees might feign injury – or even injure themselves intentionally – on the job. (You don’t have to be a sociologist to realize that those who feel trapped or unfulfilled in their work are all too eager to adopt the “sick role.”) As it stands, workers’ compensation cases have achieved notoriety among legal professionals for their tendency to last for years. While you wait, you still have to account for living and medical expenses. Furthermore, the amount that you are finally awarded to compensate your lack of a paycheck will be no more than two-thirds of your former income.

As your workers’ compensation case drags on, how do you pay the bills? One common strategy is to use credit cards, even though you know that you won’t be able to make the payments on time. While this may not be much of a solution, it is often the only realistic option, especially if you have no savings or social support system on which to fall back. Nevertheless, it results in thousands of dollars of debt and is an ultimately unsustainable course of action. You’ll eventually reach your credit limit or have your account cancelled by the credit card company.

Your workers’ compensation benefits are finally awarded. It’s a relief to have some significant income, even if it’s only a fraction of what you’d be making if you were still working. The relief is short-lived, though. The calls from collection agencies soon remind you of the massive credit card debt looming overhead. After doing a bit of research, you decide that, the stigma surrounding bankruptcy being not entirely justified, your best bet is probably Chapter 7 liquidation.

You have just one pressing concern that must be addressed before you’re willing to fully commit to filing for bankruptcy. You need to know whether your newly awarded workers’ compensation benefits will count as “exempt” property – that is, property that you get to keep. Workers’ compensation is your only real income. If the bankruptcy trustee can seize it in order to pay your creditors, then there is little point in filing for bankruptcy. Frustrating as those collection calls may be, you would rather endure them than be left without any means to pay your bills.

The federal bankruptcy exemptions are set forth in §522 of the Bankruptcy Code. This section also permits individual states to craft their own exemptions. The states can be divided into two groups, depending on how they handle this issue. In a few states, the debtor may choose between the federal exemptions and state exemptions. In most states, referred to as “opt-out” states, only the state exemptions are available to an individual seeking relief under the bankruptcy system.

California is an opt-out state. However, while as a Californian debtor you cannot choose the federal exemptions, you are not left entirely without options. California has two different sets of exemptions, known as the “703” exemptions and the “704” exemptions because those are the sections of the California Code of Civil Procedure where they are elaborated. The 703 exemptions are also referred to as the “wildcard” exemptions because any unused amount of the homestead exemption can be applied toward assets not expressly exempted. The 704 exemptions are also known as the “homestead” exemptions because they exempt a greater value of one’s primary residence.

Fortunately, workers’ compensation benefits are fully exempt under either set of exemptions. In other words: You get to keep it all!

When you file for bankruptcy, you are required by law to disclose all property that you own. This includes exempt property. You must inform the bankruptcy trustee about your workers’ compensation benefits, whether your claim is pending or the benefits have already been awarded. In either case, workers’ compensation is exempt property and will remain in your hands.

With most things in life, it is better to face the issues sooner than later. If a work-related injury has you struggling to stay on top of your credit, it is best to consult a bankruptcy attorney as soon as possible so that you know what options are available to you.

Hermin Dowe, Esq. has offices in Fairfield, Pleasant Hill, San Pablo She can be reached at (510) 233-7700.

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