LET’S assume you were injured at work and received a settlement of $500,000. However, you owe $100,000 of credit card debt and $100,000 and $150,000 on a second trust deed for a rental property in Las Vegas that got foreclosed last year and you just lost your job at Bank of America. The 2nd trust deed holder files a lawsuit to collect the $150,000, should you file for bankruptcy? Will you be able to keep the $500,000 workers compensation settlement while discharging $100,000 of credit card debt and the lawsuit of $150,000 for the 2nd trust deed?
If you live in California, you may be able to keep the $500,000 by exempting the entire amount under the State exemption of Section 704.160 of the California Code of Civil Procedure. It says that “(a) Except as provided by Chapter 1 (commencing with Section 4900) of Part 3 of Division 4 of the Labor Code, before payment, a claim for workers’ compensation or workers’ compensation awarded or adjudged is exempt without making a claim. Except as specified in subdivision (b), after payment, the award is exempt. Thus, whether the award is paid or not yet paid before the bankruptcy is filed is irrelevant to the eligibility for exemption. In this example, if the California debtor has the amount of $500,000 in his bank account and decides to file for Chapter 7 relief to discharge $250,000 of debt, he should be able to exempt the entire amount of $500,000 and keep it pursuant to 704.160 while discharging $250,000 of debt. The caveat here is debtor must use State exemptions of 704, and not Federal exemptions of 703. Federal exemptions have no provision to exempt workers’ compensation. So, if debtor uses 703, he is going to lose half of the $500,000.
But if debtor lived in New York, the outcome would be different. In New York, there is a difference between workers’ compensation paid before the bankruptcy is filed and workers’ compensation paid after the bankruptcy is filed.
In Re Wydner, the Chapter 7 debtor who lived in New York, received workers’ compensation after being involved in a car accident while working as a truck driver for Wal-Mart. He was awarded $150,000. The debtor paid his attorney $15,000 and deposited $135,000 plus $8,500 received in settlement of a personal injury claim against the other driver into an account at a Trust. Instead of using the money to pay his debts, which included unsecured debts of $74,000 included in the bankruptcy, he spent $100,000 on home improvements, a big screen TV, and elective gastric bypass surgery. The Chapter 7 trustee asked ompensation benefits received prepetition are not exempt under Section 282(2) © because the debtor has no “right to receive” them.
Hence in New York, a debtor’s right to receive workers’ compensation AFTER the bankruptcy is filed is exempt. However, workers’ compensation benefits received BEFORE the bankruptcy is filed are not exempt. But in California, whether the workers’ compensation benefits are received before or after the bankruptcy is filed makes no difference in its eligibility for exemption. If Mr. Wydner lived in California, he would be able to exempt the entire balance left in the Trust.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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