How can you protect your California Workers’ Compensation in bankruptcy? You’re hurting financially and thinking about filing bankruptcy. Let’s assume a big part of the reason you’re in financial trouble is that you were hurt at work. You either have a workers’ compensation claim pending or it’s been resolved and you’re getting benefits. You want to know whether that claim or those benefits are going to be a problem if you file bankruptcy.
ARE MY WORKERS’ COMP BENEFITS PROTECTED IN CALIFORNIA?
The short answer is yes. But there are some important conditions or exceptions. Let’s first focus on the protection itself.
When filing any form of bankruptcy, federal law allows you to protect certain assets. Your workers’ comp claim or award is an asset. That’s true whether it’s been turned into money yet or not.
The protections that bankruptcy law provides to certain assets are called “exemptions.” There is a set of exemptions in the federal bankruptcy statutes and another in California statutes. (Actually California has two sets of exemptions—more about that in a moment.)
Federal bankruptcy law’s list of exempt assets includes your “right to receive . . . a disability, illness, or unemployment benefit . . . .” U.S. Bankruptcy Code §522(d)(10)(C). This language includes workers’ comp benefits, but we don’t need to get into any more details about this. That’s because in California we can’t use this federal exemption. Each state is allowed to require those filing bankruptcy to use its own state exemptions and not the federal ones if it so chooses. Bankruptcy Code §522(b)(2) and (3)(A). And California has done so. California Code of Civil Procedure §703.130.
So if you are a resident of California filing bankruptcy here, you have to use the California exemptions. This includes the ones applicable to workers’ comp.
WHAT ARE THE CALIFORNIA EXEMPTIONS APPLICABLE TO WORKERS’ COMP?
As mentioned above, California has two distinct sets of exemptions. This is unusual. Most other states usually have only one set of exemptions.
Having two different sets of exemptions does give you the advantage of having two to choose from. That’s great because both sets of California’s exemptions have one that applies to workers’ comp benefits.
But one challenge to having two sets of California exemptions is that you and your bankruptcy lawyer have to choose between them. You can’t pick and choose some of the exemptions in one set for some of your assets and other exemptions from the other set for your other assets. You and your lawyer must decide which of the two better protects your unique accumulation of assets—including your workers’ comp asset.
The two California sets of exemptions are found in two areas of its Code of Civil Procedure, in Section 703 and 704.
WHAT’S THE CALIFORNIA 703 WORKERS’ COMP EXEMPTION?
The 703 exemption that applies to your workers’ comp asset says that the following is covered:
[your] right to receive . . . the following: . . . A disability, illness, or unemployment benefit.
The local bankruptcy court for the federal Central District of California, Los Angeles Division, has ruled on the applicability of this to a workers’ comp award. The judge cited a respected bankruptcy resource as follows:
“Workers’ compensation benefits are generally treated as disability benefits and thus exempt without regard to amount or whether the award is necessary for the support of the debtor (or debtor’s dependents).” 2 March, Ahart and Shapiro, California Practice Guide: Bankruptcy, ¶ 7:626 at 7-81 (2015) (emphasis in original), citing, In re Cain, 91 B.R. 182, 183 (Bankr. N.D. Ga. 1988) (construing 11 U.S.C. § 522(d)(10)(C), which verbatim mirrors the language of California Code of Civil Procedure § 703.140(b)(10)(C)[remaining citations omitted].
In re Aubry, 558 B.R. 333, 342 (Bankr. C.D. Ca. 2016).
Although this judge’s published opinion is not necessarily a legally binding interpretation, it’s a relatively recent and quite strong endorsement that your workers’ comp claim or benefit constitutes a “disability” for purposes of the 703 exemption quoted above. As such the entire claim or benefits is very likely exempt “without regard to amount or whether the award is necessary for [your] support.”
(Note that this exemption is subject to a possible exception for debts owed from “a judgment for child, family, or spousal support.” CCP §703.070. Whether and when this exception applies is complicated and beyond the scope of this blog post. If you owe any support related to a domestic relations judgment, ask your Southern California bankruptcy lawyer for advice about this aspect.)
HOW ABOUT THE 704 WORKERS’ COMP EXEMPTION?
The 704 exemption is even more straightforward because it refers explicitly to workers’ comp assets as exempt. It distinguishes between a workers’ comp claim before and after it has been paid:
before payment, a claim for workers’ compensation or workers’ compensation awarded or adjudged is exempt . . . .
CCP §704.160(a). There are no conditions stated that limit this exemption.
However, there is a condition to a workers’ comp claim after it’s been paid:
Except [for child, spousal, and family support], after payment, the award is exempt.
CCP §704.160(a). This exception states that the person owed support
may, through the appropriate local child support agency, seek to apply the workers’ compensation temporary disability benefit payment to satisfy the support judgment.
CCP §704.160(b). This exception to the exemption “also includes [the collection of] past due support or arrearage when it exists.” CCP §704.160(d)(3). Furthermore, the creditor owed support may get “an earnings assignment order for support” and receive up to 25% of each workers’ comp “periodic payment.” CCP §704.160(c).
As mentioned above about the possible exception for support judgments in the 703 set of exemptions, this gets complicated so talk with your bankruptcy lawyer about the effect of such judgments on this 704 exception to the workers’ comp exemption.
To summarize so far, under both sections 703 and 704 California law sets of exemptions, workers’ compensation awards are exempt and protected—with the possible exception of debts for support.
SO HOW DO I PICK BETWEEN THE 703 AND 704 EXEMPTIONS?
So how do you choose between the 703 and 704 exemptions if you have a workers’ comp claim or award? The answer depends on your entire combination of owned assets. The 703 and 704 sets of exemptions each have advantages and disadvantages as applied to specific assets. So this crucial decision involves a thorough analysis of your unique combination of assets, which you when meeting with your Southern California bankruptcy lawyer.
However, here’s some indication about how this works.
One advantage of the 703 set of exemptions is a relatively high “wildcard” exemption. Most exemptions apply to specific types of assets—your home, vehicle, household goods and such. As you might guess, the “wildcard” exemption can be used for assets not covered at all, or not covered fully, by one of the asset-specific exemptions. This “wildcard” exemption becomes much larger if you have neither real estate nor personal property to protect with the homestead exemption, because that unused homestead exemption gets added into the “wildcard” amount. So if you have assets that aren’t otherwise protected, using the 703 set of exemptions, and this “wildcard” exemption, could be advantageous. For more details about this “wildcard,” see our earlier blog post titled California Wildcard Exemption in Bankruptcy – How Is it Used?
On the other hand, the biggest advantage of the 704 set of exemptions is likely the much, much larger homestead exemption it provides. The amount of equity protected is at least $300,000, and can be as large as $600,000 (effective January 1, 2021). The homestead exemption is larger than $300,000 when the “countywide median sale price for a single-family home” in the prior calendar year was more than that amount. CCP §704.730. For more on this see our recent blog post titled Huge Increase in California Homestead Exemption. By contrast the 703 homestead exemption is only $29,275 (effective January 1, 2021).
WHAT ELSE DO I NEED TO KNOW TO PROTECT MY WORKERS’ COMP AWARD?
Here are two very important final practical points.
First, you can lose the protection of the workers’ comp exemption if you’re not very careful. For example, according to CCP §703.080 if you receive workers’ comp money and put it into an account it only remains exempt if the money in that account can be traced to the exempt source. You have “the burden of tracing an exempt fund,” so if you don’t meet that burden the money is no longer protected. It could be taken in bankruptcy to pay your creditors.
Second, it’s essential that you be honest and clear with your lawyer and with the bankruptcy court in listing the workers’ comp asset and then claiming the exemption. Otherwise you can lose the exemption, and again then money from the claim or award could be used to pay your creditors. There’s a good example of this lesson in the local Aubry case cited earlier. There the bankruptcy judge ruled that the debtor would have been entitled to exempt and keep a series of future workers’ comp award payments worth about $218,000. However she lost it all to the Chapter 7 trustee and to her creditors because she hid it from her attorney and from the court until a creditor tattled on her. It pays to be candid. If you have any concerns or questions, tell your lawyer, whose job is to protect you and serve your interests.
One last thing: California workers’ comp exemption law applies to bankruptcies filed in California, with one important exception: if you’ve moved relatively recently to the state. See our earlier blog post, When Can I Use California Property Exemptions If Recently Moved Here?
Your workers’ compensation claim and/or award are quite strongly protected when filing bankruptcy in California. But you need to be careful to not lose this protection, and to choose the right set of exemptions to protect all of your other assets as well. See a competent bankruptcy lawyer sooner rather than later to accomplish these goals.