Many workers live paycheck-to-paycheck. Unfortunately, a workplace injury can cause financial crisis—especially if your workers compensation claim is disputed. Some injured workers are forced to file for bankruptcy. Fortunately, in most (but not all) states, workers compensation benefits are either fully or partially exempt.

How does Bankruptcy Affect Workers Compensation?

Bankruptcy laws vary from state-to-state. Some states have adopted the U.S. Bankruptcy Code, while others have their own set of laws. Additionally, each state has its own set of bankruptcy exemptions. These exemptions prevent a bankruptcy trustee from seizing certain types of assets.

Most states fully or partially exempt workers compensation benefits from a bankruptcy. However, there may be limitations to this protection. For example, some workers comp settlements may not be exempt. And, if you “commingle” your workers compensation benefits by depositing them in a bank account containing other assets, the benefits may be seized.

If you receive workers compensation, you should advise your bankruptcy lawyer of these benefits. Your lawyer can advise you about the specific rules and exemptions in your state.

Does it Matter What Chapter of Bankruptcy was Filed?

There are two common types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcies involve a complete liquidation of your assets. In a Chapter 13 bankruptcy, you may retain certain assets if you complete a court-ordered repayment plan.

Typically, workers compensation exemptions cover both Chapter 7 and Chapter 13 bankruptcies. However, you should always consult with your bankruptcy lawyer about the specific rules in your state.

While workers compensation benefits may be exempt, they will be considered as income when determining whether you qualify for a Chapter 7 or Chapter 13 filing. (Both Chapter 7 and Chapter 13 bankruptcies have income-based qualification rules.)

If an Employer Files for Bankruptcy, What Happens to Pending Workers Compensation Claims?

If your employer files for bankruptcy, it is important that you notify your workers compensation attorney. Depending on where you live and your employer’s type of coverage, the bankruptcy may impact your right to benefits or the availability of settlement.

Generally speaking, there are two kinds of workers compensation coverage:

  • An employer buys insurance from a state-run program or a private insurance company, or
  • An employer is “self-insured”—administering and paying claims out of its assets. (In order to be self-insured, most states require proof of financial resources and stability.)
  • If your employer is covered by an insurance policy, a bankruptcy should not impact your workers’ comp benefits.

However, if your employer was self-insured or uninsured, bankruptcy may add additional challenges to your workers comp claim.

  • If your self-insured employer files Chapter 7 bankruptcy, its assets will be liquidated (and the business will close). An injured worker becomes a debtor—and may have to file a creditor claim with the bankruptcy court.
  • If your self-insured employer files for Chapter 11 bankruptcy, it will have two options:
    • Continue to maintain self-insurance with the approval of the bankruptcy court, or
    • End its self-insured status and buy insurance coverage. In this case, injured workers may have to file a creditor claim with the bankruptcy court.

Most states also have a Guaranty Fund that protects injured workers when a self-insured company files for bankruptcy. You may be able to file an additional claim with your state’s Guaranty Fund.

If your employer files for bankruptcy, you should notify your workers compensation lawyer of this change. Your lawyer can guide you through the claims process with both the Guaranty Fund and the bankruptcy court.

Can a Lawyer Help Protect my Workers Compensation Benefits During a Bankruptcy?

Bankruptcy laws vary from state-to-state. Depending on where you live, your workers compensation benefits may be fully or partially exempt. A bankruptcy lawyer can help you understand your exemptions and guide you through the bankruptcy process (while protecting your rights and assets).

An employer’s bankruptcy may also impact your right to workers compensation benefits. If you have questions about your right to benefits, contact a workers compensation lawyer. A lawyer can help you obtain workers comp benefits and protect your rights during your employer’s bankruptcy.