Author: Andrew M. Thaler
Spiros Avramidis
As discussed in prior articles, it is imperative that debtors consult with an experienced bankruptcy attorney to receive accurate advice on what property is protected from creditors. One tricky area that occasionally arises is whether workers’ compensation benefits are exempt. The answer: it depends.
The starting point of any exemption analysis is whether a debtor is utilizing the exemption scheme available under either Federal law or New York law. The applicable statute under Federal law is 11 U.S.C. § 522(d)(10), which provides that “[t]he following property may be exempted … (10) The debtor's right to receive … (C) a disability, illness, or unemployment benefit.”[1] While the applicable New York statute is Debtor & Creditor Law § 282(2)(e), which provides as exempt “[t]he debtor's right to receive or the debtor's interest in: … (c) a disability, illness, or unemployment benefit.”[2]
The starting point of any exemption analysis is whether a debtor is utilizing the exemption scheme available under either Federal law or New York law. The applicable statute under Federal law is 11 U.S.C. § 522(d)(10), which provides that “[t]he following property may be exempted … (10) The debtor's right to receive … (C) a disability, illness, or unemployment benefit.”[1] While the applicable New York statute is Debtor & Creditor Law § 282(2)(e), which provides as exempt “[t]he debtor's right to receive or the debtor's interest in: … (c) a disability, illness, or unemployment benefit.”[2]
In determining exemptibility, the focus is on whether the workers’ compensation benefits were paid prior to or after the bankruptcy petition was filed. In other words, exemptibility of workers’ compensation benefits focuses on whether the Debtor has already received payment and, for instance, is sitting in the Debtor’s bank account. If a debtor has not yet received payment for workers’ compensation benefits, it is likely exempt under both Federal and New York law as the debtor under either scheme has a “right to receive” the benefits.
However, a divergence in exemptibility may occur if the debtor received the workers’ compensation payment prior to filing for bankruptcy. This divergence requires a close reading of the above two applicable statutes. The New York statute includes the additional language of “the debtor's interest in” after “right to receive.” Federal law is silent as to “the debtor’s interest in.” Although the additional language is minor, it creates a very important distinction that some courts have latched onto.
Under Federal law, the debtor cannot claim an exemption in already received workers’ compensation benefits once received because the debtor no longer has a “right to receive” the benefits – the debtor has already received them. Further, Federal law, under that specific exemption, does not authorize tracing as it does in 522(d)(11).
Under New York law, the answer may differ based on the controlling court. There is a developing split in case law as to whether benefits already received are exempt under Debtor & Creditor Law § 282(2)(e). One bankruptcy court in the WDNY interpreted the language “debtor’s interest in” to not apply to subsection (e), meaning that application of Federal or New York law should not create a divergence in exemptibility; this court relied upon legislative history behind the inclusion of “the debtor’s interest in” language. See in re Wydner, 454 B.R. 565 (Bankr. W.D.N.Y. 2011). However, a bankruptcy court in the EDNY took a different stance and found that “debtor’s interest in” applies to the entirety of § 282(2), meaning that the application of New York law would differ from Federal. See in re Nuara, 8-18-75891-las, (Bankr. E.D.N.Y. 2019), a case in which the author herein was Trustee and counsel to the bankruptcy estate.
As always, it is important to discuss bankruptcy exemption with an experience professional that deals with these issues and can adequately plan to avoid the loss of assets.
[1] There is a minority view that the applicable statute is 11 U.S.C. § 522(d)(11)(e). However, this article presumes that 522(d)(10) controls.
[2] As above, there is an argument that NY Debt. & Cred. § 282(3)(iv) is controlling. However, this article presumes that 282(2)(e) controls.
However, a divergence in exemptibility may occur if the debtor received the workers’ compensation payment prior to filing for bankruptcy. This divergence requires a close reading of the above two applicable statutes. The New York statute includes the additional language of “the debtor's interest in” after “right to receive.” Federal law is silent as to “the debtor’s interest in.” Although the additional language is minor, it creates a very important distinction that some courts have latched onto.
Under Federal law, the debtor cannot claim an exemption in already received workers’ compensation benefits once received because the debtor no longer has a “right to receive” the benefits – the debtor has already received them. Further, Federal law, under that specific exemption, does not authorize tracing as it does in 522(d)(11).
Under New York law, the answer may differ based on the controlling court. There is a developing split in case law as to whether benefits already received are exempt under Debtor & Creditor Law § 282(2)(e). One bankruptcy court in the WDNY interpreted the language “debtor’s interest in” to not apply to subsection (e), meaning that application of Federal or New York law should not create a divergence in exemptibility; this court relied upon legislative history behind the inclusion of “the debtor’s interest in” language. See in re Wydner, 454 B.R. 565 (Bankr. W.D.N.Y. 2011). However, a bankruptcy court in the EDNY took a different stance and found that “debtor’s interest in” applies to the entirety of § 282(2), meaning that the application of New York law would differ from Federal. See in re Nuara, 8-18-75891-las, (Bankr. E.D.N.Y. 2019), a case in which the author herein was Trustee and counsel to the bankruptcy estate.
As always, it is important to discuss bankruptcy exemption with an experience professional that deals with these issues and can adequately plan to avoid the loss of assets.
[1] There is a minority view that the applicable statute is 11 U.S.C. § 522(d)(11)(e). However, this article presumes that 522(d)(10) controls.
[2] As above, there is an argument that NY Debt. & Cred. § 282(3)(iv) is controlling. However, this article presumes that 282(2)(e) controls.
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