A bankruptcy attorney sent me an interesting question about treatment of workers compensation benefits in the Chapter 7 means test calculation. Workers compensation payments are exempt from creditor garnishment outside of bankruptcy, and debtor’s accumulated worker’s compensation is exempt in bankruptcy. This attorney’s client had recently received a significant lump-sum workers comp settlement. The attorney knows the money is not part of a Chapter 7 bankruptcy estate, but he ask whether the money counts as income in his clients means test. If it is income, his client would have to wait six months after the settlement in order to pass the means test. (The means test considers household income during the prior six months).
I think workers compensation receipts are included as means test income. It doesn’t make any difference if the debtor receives monthly checks or a lump-sum settlement. The means test is independent of exemption analysis. Workers compensation is one of several examples I’ve encountered with my bankruptcy clients where money exempt from creditors and exempt in bankruptcy can still cause a debtor to fail the means test for Chapter 7 bankruptcy.
This attorney’s clients needs to sit back and wait until six months after his workers compensation settlement. When he does qualify for Chapter 7, the remaining settlement proceeds should be exempt as long as he can trace funds in his financial account to the settlement check.