How does filing Chapter 13 affect a workers' compensation settlement?

Mitchell Allen
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Mitchell Allen is the founder and CEO of the Debt Education Certification Foundation, an organization that provides credit counseling certificates and debtor education courses for those who are filing for bankruptcy. He’s also the founder of legal services marketing agency LeadRival. He’s the author of numerous books on debt and bankruptcy.

Mitchell is not an attorney and his answers should not be considered legal advice. Please consult with an attorney about your legal situation. Full Bio


How does filing Chapter 13 affect a workers' compensation settlement?


Filing for Chapter 13 bankruptcy could result in workers' compensation settlement money being seized for the repayment of debts, depending on the state in which you live. If you are receiving workers' compensation benefits or have been awarded a settlement for a work-related injury, consult an attorney before proceeding with a Chapter 13 bankruptcy.

In the case of a Chapter 7 bankruptcy, however, settlement proceeds will most likely be exempt, and you would therefore be entitled to keep the full amount of the settlement money.

Understanding Your Rights

It is generally better to file for Chapter 13 or a Chapter 7 before settling a workers' compensation claim. In the case of a Chapter 7 bankruptcy, all debts would be erased prior to receiving a workers' compensation settlement and there would be no risk that creditors may claim the settlement money.

However, even if you file Chapter 13 prior to settling a workers' compensation claim, or if you are in the middle of a repayment plan for Chapter 13, the situation could become complicated. Seek sound advice from your workers' compensation attorney and a bankruptcy lawyer in order to protect your rights.

A portion of the money received from a workers' compensation settlement could be claimed by a bankruptcy trustee, an impartial administrator appointed by the court to oversee your bankruptcy case. The trustee will then transfer the money to your creditors.

Chapter 7 and Chapter 13 Bankruptcy

Filing Chapter 7 completely removes a person's debt and can take only three months to complete. The debtor's property is sold and the proceeds are used to pay creditors.

A Chapter 13 bankruptcy differs from a Chapter 7, primarily because it functions as a repayment plan lasting three to five years. During this time, monthly payments are made to creditors by the trustee. The debtor needs to have a regular income to complete a Chapter 13 bankruptcy. This income does not have to come from a job. For instance, alimony payments can be used to pay the debt.

Workers’ compensation benefits can also be used for repayment of debts. The bankruptcy court will most likely approve a debtor's Chapter 13 plan if the workers’ compensation benefits are sufficient to make payments to the plan. This is a different situation, however, than when a worker receives a lump sum settlement for a work-related injury claim.

Workers’ Compensation Benefits and Chapter 13

When someone has suffered a work-related injury and can no longer work, they are typically paid a portion (usually 66.6%) of their regular income as workers' compensation. In most circumstances, these benefits will continue, even if bankruptcy is filed.

If the applicable state law says that workers' compensation benefits are exempt, then the bankruptcy trustee cannot seize the compensation. These benefits, however, will be used to determine the amount of repayment to the trustee for a Chapter 13 bankruptcy.

Because filing Chapter 13 could put a portion of your workers' compensation settlement at risk, it is important to seek legal advice from both a bankruptcy attorney and your workers' compensation lawyer to ensure that your legal rights are protected. Whether or not your settlement is exempt depends on the circumstances surrounding your case and state law. In some cases, workers' compensation settlement money could be considered income, and therefore part of the award would be claimed by the trustee for repayment of a Chapter 13 debt.

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