If I File Bankruptcy, Do I Lose My Workers’ Comp Benefits?

No, you don’t lose your workers’ comp benefits if you file bankruptcy. That’s very good news for Illinois families because job injuries and financial problems often go hand-in-hand. Injury-related lost wages exceed $9 billion per year. Workers’ compensation offsets some, but not all of, these costs. Most families live from hand to mouth. So, a few dollars missing from each paycheck could be financially devastating.

In general, bankruptcy law and state exemption statutes provide significant protection for workers’ compensation benefits, recognizing their purpose as income replacement and medical support. More specifically, a Chicago bankruptcy lawyer ensures that these protections are more than just words on paper. Attorneys work hard to protect property during bankruptcy so these families get the fresh start the Bankruptcy Code guarantees.

Legal Protections in Illinois

Federal bankruptcy exemptions include a very strong statement that workers’ compensation benefits, like Social Security and most other government benefits, are exempt in bankruptcy. A trustee (person who oversees a bankruptcy for a judge) cannot liquidate exempt assets to pay debts.

The Prairie State has opted out of the federal exemptions. The state law workers’ compensation bankruptcy exemption is rather weak and generic. Fortunately for debtors, the exemption is just the beginning of the legal protections for workers’ compensation benefits in Illinois.

The Illinois Workers’ Compensation Act explicitly exempts workers’ compensation benefits from attachment, garnishment, or seizure by creditors. This exemption applies in bankruptcy, ensuring that workers’ compensation benefits are not included in the bankruptcy estate and cannot be used to repay unsecured debts such as credit cards or medical bills.

Chapter 7, Chapter 13, and Job Injury Benefits

In a Chapter 7 bankruptcy, the court may liquidate non-exempt assets to satisfy creditor claims. However, workers’ compensation benefits in Illinois are fully exempt, whether they are paid periodically or received as a lump-sum settlement.

Two key conditions apply. First, the workers’ compensation benefits must be clearly identifiable and not commingled with nonexempt assets, such as passive income. Additionally, the benefits must arise from a compensable workplace injury. If an insurance company paid a settlement without admitting that the victim had a job-related injury, benefits could be in jeopardy.

Protections in Chapter 13 bankruptcy are a bit more complex, especially with regard to the debt repayment plan. Courts allow workers’ compensation benefits to be considered when assessing the debtor’s overall financial situation. However, Illinois exemption law prevents creditors from directly accessing those funds. Additionally, the repayment plan must allow debtors to retain sufficient benefits to meet minimum reasonable needs, including healthcare costs.

Special Workers’ Compensation Issues

As mentioned above, a Chicago bankruptcy lawyer must ensure that workers’ compensation funds are properly handled.

If workers’ compensation payments are deposited into a bank account that also contains other income, such as wages or tax refunds, exempt and nonexempt funds are commingled. Commingling doesn’t automatically eliminate the exemption, but it makes it harder to prove which portion of the account balance is protected.

Timing can also be important. If a debtor receives a lump-sum workers’ compensation settlement shortly before filing for bankruptcy, the settlement is still exempt under Illinois law. However, if the funds are spent on non-essential or luxury items before filing, the bankruptcy trustee may scrutinize those transactions.

One other warning. Debtors must distinguish workers’ compensation benefits from other types of injury-related compensation. Personal injury settlements not arising from workers’ compensation claims may be subject to different exemption limits under Illinois law.

Contact a Thorough Cook County Lawyer

No matter what kind of financial problem you have, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits  are available.

Source:

pubmed.ncbi.nlm.nih.gov/40812486/