What happens to your workers compensation settlement?
Filing for bankruptcy is an important decision, and there are many factors to consider. If you have received a workers compensation settlement as a result of a workers compensation claim, you may worry that filing for bankruptcy will cause you to lose this money. However, the State of Florida has protections in place specifically to exclude your workers compensation benefits and settlements from creditors’ claims.
Bankruptcy courts will protect workers compensation benefits, including settlements, belonging to an injured worker. Florida Statutes, Section 440.22 clearly states that:
[Workers compensation] benefits shall be exempt from all claims of creditors, and from levy, execution and attachments or other remedy for recovery or collection of a debt, which exemption may not be waived. However, the exemption of workers’ compensation claims from creditors does not extend to claims based on an award of child support or alimony.
Some bankruptcy trustees and judgment creditors have attempted to argue that this exemption for workers compensation benefits is lost once an injured worker deposits the proceeds of a lump sum settlement into a savings account. However, the Florida Supreme Court has rejected this argument. [Broward v. Jacksonville Medical Center, 690 So.2d 589 (Fla. 1997).] In that case, an injured worker took his lump sum payment from a workers compensation settlement and deposited it into a savings account. A judgment creditor then attempted to garnish the bank account. The Florida Supreme Court held that the funds in the account, which had not been co-mingled with any other funds, were exempt under the statute quoted above, and therefore the judgment creditor was not entitled to them.
Florida bankruptcy courts have since relied on this court decision to hold that when an injured worker files bankruptcy, the proceeds of a workers compensation settlement remain exempt, and therefore do not have to be turned over the trustee to pay creditors. Even though one bankruptcy court has held that exempt settlement funds co-mingled with non-exempt funds do not lose their exempt status [In re Mix, 244 B.R. 877 (S.D. 2000)], it is advisable that any workers compensation benefits be placed in a segregated account that is identified for that purpose. One Florida Middle District bankruptcy court has held that settlement funds can be used to purchase stocks or other investments to try to maximize the value of the funds, without losing their exempt status. [In re Harrelson, 311 B.R. 618 (Fla. M.D. 2004).] However, if the settlement proceeds are pledged as security for a debt, they will likely lose their exempt status. See Sullo v. Cinco Star, Inc., 755 So.2d 822 (Fla. 5th DCA 2000), which argued that a bank CD purchased solely with funds of a workers compensation settlement was not exempt because the debtor had pledged it as security for a loan.