Workers’ Compensation Benefits and Bankruptcy

Workers’ Compensation Benefits and Bankruptcy

What happens to your Minnesota workers’ compensation benefits when you file for bankruptcy?

Considering filing for bankruptcy but worried that you might lose your workers’ compensation benefits by doing so? Under both federal law and Minnesota law, these benefits are generally exempt from claims by creditors, and Minnesota law in particular has this situation well-covered. State law specifically provides that work comp claims are exempt from seizure or sale for the payment of any debts or liabilities. What that means as far as bankruptcy is that your workers’ compensation benefits can generally be “reclaimed” from your bankruptcy estate and your benefits won’t be part of the pool of money used to pay your creditors.

What types of workers’ compensation benefits are exempt?

The short answer is “pretty much all of them.” Some examples of what, specifically, is exempt:

  • Future payments, if you are receiving periodic compensation payments;
  • Lump-sum payments, both before and after they are received; and
  • Settlements, even if received prior to filing of bankruptcy petition, since settlements are subject to reopening in the future if your condition substantially worsens.

What Benefits are Not Exempt?

The short answer to this is “not many, if any.” While the issue doesn’t appear to have been addressed in Minnesota, other states have disallowed the workers’ compensation benefits exemption in cases where the benefits were obtained by fraud or mistake. Although Minnesota law doesn’t explicitly provide a similar disallowance, your creditors could attempt to argue that your benefits were obtained by fraud or mistake and thus should not be exempt from your bankruptcy estate. Other issues which have come up in different states on this point involve voluntary compensation payments from the employer to the employee which were made prior to an official workers’ compensation award, and workers’ compensation proceeds that the employee has placed in a bank account that is subject to garnishment. If any of these situations may apply to you, talk them over in detail with your lawyer.

State v. Federal Law

Keep in mind that when you are filing a bankruptcy petition, you will have to choose whether you want to use the Minnesota state bankruptcy exemptions or the federal bankruptcy exemptions. If you are or will be receiving workers’ compensation benefits, it may be in your best interest to use the Minnesota state exemptions, since state law is more explicit in its inclusion of workers’ compensation benefits in the listed exemptions.

Roko Law

Christopher Rosengren
Rosengren, Kohlmeyer & Hagen, Law Office
150 St. Andrews Court, Suite 110
Mankato, Minnesota 56001