Chapter 13 Bankruptcy

What happens if you are in the middle of Chapter 13 when you get hurt at work?  What happens if you need to file Chapter 13 after you get hurt?  Let’s look at the impact of a Chapter 13 in each of these scenarios.

First, let’s make sure that you are clear about what a Chapter 13 is and how it differs from Chapter 7.  My husband, Jonathan Ginsberg, has been practicing consumer bankruptcy law in the Atlanta area for over 20 years and I have asked him to write this section of my web site.

What is a Chapter 13?

Chapter 13 is a type of bankruptcy in which you pay back your bills over time.   When I am assisting a bankruptcy client, I look at his household income and expenses (i.e. his household budget), and I look at his debts.  In order to file a Chapter 13 , you must have enough “disposable income” left over at the end of the month to fund a Chapter 13 repayment plan.

You can fund a Chapter 13 plan if your source of income is weekly wage benefits from workers’ compensation, and you can file a plan that calls for a lower payment now, and a higher payment later, once you return to work.  You can also build into your Chapter 13 a lump sum payment from an expected settlement.

Chapter 13 differs from Chapter 7 in that a Chapter 7 is designed to wipe out debt and surrender secured property you can no longer afford.

Whether you are considering Chapter 7 or Chapter 13, please make sure to let your workers’ compensation lawyer and your bankruptcy lawyer know what you are thinking before you actually file.

Now, let’s see what happens when you are involved in both workers’ compensation and Chapter 13.

Job Injury While Chapter 13 in Progress

Sometimes, I meet with a new client who just got hurt on the job and I learn that my new client is currently in a Chapter 13 bankruptcy.   Here is what I tell him:

Talk to your bankruptcy lawyer about talking to the Chapter 13 trustee about lowering your payments.  In a Chapter 13 you pledge to send all of your disposable income to the trustee to pay back creditors.   When you are out on workers’ comp, you will most likely see less money coming home each month.  Further, your employer cannot honor your payroll deduction because your lost wage payments come from an insurance company not regular payroll.

In many cases it is possible to work out an agreement with the trustee to reduce your payments, at least temporarily.   This will allow you to keep your Chapter 13 alive without falling behind

Ask your bankruptcy lawyer to contact me about my representation.  In order for me to represent you, I will need to file a request for appointment as a professional in your bankruptcy case.  By doing this I must agree that if your case settles, I will first have to notify the trustee and judge.

Most of the time, bankruptcy lawyers can argue that worker’s compensation settlements are fully or partially “exempt” assets.  If your settlement is exempt, that means that you get to keep the money.  To the extent that your settlement is not exempt, you must pay it to the trustee for distribution under your plan.  Sometimes you may need to allocate part of your settlement to your Chapter 13 case to meet the terms of your plan.

Every Chapter 13 case is different but it is wise to have your bankruptcy lawyer and your workers’ compensation lawyer discuss these issues early on in your case, rather than at the last minute.

Filing Chapter 13 After Your Workers’ Compensation Case Starts

I sometimes get calls from current workers’ compensation clients who need to file Chapter 13 to stop a foreclosure, repossession or lawsuit.  Here are some of the issues we face:

Issue 1:  Budgets:  before you can file a Chapter 13, your attorney must complete something called a “means test analysis.”  This analysis looks at your household income during the 6 months prior to your filing date.   Since your workers’ compensation income will likely be less than your normal income, you may be able to reduce what you have to pay towards your Chapter 13 plan, or you may be able to squeeze into a Chapter 7.   Sometimes waiting a month or two to file can save you thousands over the life of your plan.

Similarly, the “real life” budget you file in a Chapter 13 should represent your household income and expenses.  When you replace your normal income with workers’ compensation wage benefits, your budget will be skewed.   A creative Chapter 13 lawyer can structure a plan that calls for reduced payments now, and higher payments when you return to work.

Issue 2:  Settlement:  once you file Chapter 13, you give up a certain amount of control in your financial life.  Specifically a Chapter 13 trustee must approve of any major financial decisions.  Before you can settle your case, your workers’ compensation lawyer must file paperwork to get approved as special counsel, and your bankruptcy judge must sign off on any settlement.

I have had success in the past declaring lump sum settlements as “exempt” or sheltered assets for bankruptcy purposes.  If an asset is exempt, that means that you get to keep the entire settlement on the grounds that your settlement money is necessary for the support and maintenance of you and your dependents.

However, the question of whether a settlement is fully or partially exempt must be negotiated with your Chapter 13 trustee before you sign the settlement papers.