Are Workers Compensation Settlements Protected in Bankruptcy?

It seems like a lot of our cases involve debtors who fall behind on bills after becoming injured at work. After exhausting their savings and retirement accounts, the workers compensation insurance company makes a low-ball offer to settle the claim. Another tactic I see is where the insurance companies frequently terminates the temporary workers compensation payment based on some technicality in an effort to force a settlement.

Are Workers Compensation Settlements Protected in Bankruptcy?

Generally speaking, workers compensation benefits, including those awarded by other states, are protected in Nebraska bankruptcy cases. Nebraska Statute 48-149 states the following:

"No proceeds or interest thereon from payments or lump-sum settlements under the Nebraska Workers' Compensation Act or law of another state which provides compensation and benefits for employees sustaining job-related injuries shall be assignable, subject to attachment or garnishment, or held liable in any way for any debts, except (1) as provided in section 48-108 and (2) payments under the act or any law of another state which provides compensation and benefits for employees sustaining job-related injuries shall be subject to income withholding under the Income Withholding for Child Support Act, administrative attachment and bank matching pursuant to sections 43-3328 to 43-3339, and garnishment by a county attorney or authorized attorney pursuant to section 43-512.03 or garnishment for child support as defined in section 43-1705 by an obligee as defined in section 43-1713."

Case Law

Two notable Nebraska Bankruptcy Court opinions deal with worker compensation benefits:

In the case of In Re Jorash, Nebraska bankruptcy case 98-81340, the debtor had received a $37,000 workers compensation award, and he used $20,000 of the settlement as a down payment on his residence. Shortly thereafter, the debtor filed bankruptcy and the Chapter 7 Trustee attempted to claim the home. The Court ruled that the home was protected under Nebraska's exemption law. The Court ruled that not only does the exemption extend to the settlement funds held in a bank account, but it also protected property purchased with the settlement.

In the second case, In Re Mendoza, Nebraska bankruptcy case 05-81175, the bankruptcy court ruled that a hospital's medical lien did not attach to a workers compensation settlement. The Court cited Nebraska Statute 52-401 which states that "no such lien shall be valid against anyone coming under the Nebraska Worker's Compensation Act."

Chapter 13 allows a debtor more time to settle a workers compensation claim.

Frequently I see debtors who are being sued and garnished for unpaid medical debts stemming from a workplace injury. After running out of money and being fed up with the nonstop telephone calls from bill collectors, debtors feel great pressure to accept a low settlement offered by the employer's insurance company. Filing Chapter 13 greatly changes the dynamics of the settlement negotiations by giving a debtor up to five (5) years of protection from creditors. Filing bankruptcy immediately stops the creditor phone calls and lawsuits, and it will allow the workers compensation attorney the time needed to achieve a maximum settlement.