§ 12.6 — Disability Benefits; Workers’ Compensation
Revised: April 26, 2016
Frequently, a physically disabling event causes financial distress. Sometimes, an injured debtor’s only source of income at least for weeks or months will be a disability benefit. When the disability payments will continue for a substantial period in an amount sufficient to fund a Chapter 13 plan, the courts have admitted disability beneficiaries to Chapter 13.1 The eligibility issue is whether the amount and duration of benefits are sufficiently regular and stable to constitute regular income for purposes of §§ 109(e) and 101(30).2
The injured or disabled debtor presents a difficult eligibility picture. Disability benefits or workers’ compensation payments, if available, typically do not commence immediately, and the duration of payments is uncertain. The debtor expects to return to work when the injury has healed, but the timing of the return to work and the availability of the debtor’s job are additional uncertainties. Bankruptcy counsel may have to undertake the unfamiliar burden of determining the debtor’s eligibility for disability benefits, the duration of those benefits, and the best medical opinion of when the debtor will be physically able to return to work.
Debtors injured at work are often entitled to some form of workers’ compensation under state law. Sometimes the benefits are periodic payments; sometimes the benefits are a lump sum. Typically, proving entitlement to workers’ compensation is not automatic or immediate—involving in some jurisdictions the hiring of attorneys and administrative or judicial proceedings.
When disability benefits or workers’ compensation is payable as a lump sum, other issues intrude with respect to “regular income” and eligibility for Chapter 13. The entitlement to disability benefits or workers’ compensation is an asset of the Chapter 13 estate, but there is controversy whether the liquidation of that asset after the petition is properly characterized as an income-producing event.3 When eligibility for Chapter 13 depends in whole or in part on the expectancy of a lump-sum payment for disability benefits or workers’ compensation, the debtor will want to argue that the future payment should be treated as income for eligibility purposes. Accounting for any lump-sum payment for purposes of the projected disposable income test at confirmation is another story altogether4—an issue best kept separate from the regular income necessary for eligibility in the first instance.
1 See In re Allen, 241 B.R. 710, 714 (Bankr. D. Mont. Dec. 3, 1999) (Peterson) (On trustee’s objection to confirmation on ground that the debtor lacks regular income because hospital at which debtor works is seeking relief from the stay to terminate the debtor, court notes that debtor has a medical condition that will permit him to apply for disability insurance benefits. “Those applications are pending and if the applications are granted, the disability payments will provide adequate income to fund the plan in the same amount as Debtor’s present hospital income. Furthermore, under the hospital contract, the notice of termination, if allowed, requires a 120 day notice, so Debtor’s income is at least secure for a period of time to await the decision on the disability income application.”); In re Dawson, 13 B.R. 107 (Bankr. M.D. Ala. July 23, 1981) (Hopper) (state disability benefits); In re Howell, 4 B.R. 102 (Bankr. M.D. Tenn. Mar. 28, 1980) (Jennings) (federal disability benefits). But see In re Schauer, No. 99-31918, 2000 WL 33792712, at *6 (Bankr. D.N.D. Aug. 14, 2000) (unpublished) (Hill) (“According to his own cash flow analysis, Schauer has no means of funding the monthly payments required by the plan. His ability to make monthly plan payments depends entirely on his receipt of disability benefits . . . . [S]uch benefits had already been denied.”).
2 See § 11.1 What Is Regular Income?. See, e.g., In re Tucker, 34 B.R. 257 (Bankr. W.D. Okla. Oct. 27, 1983) (Bohanon) (Debtor currently receiving disability payments has burden to prove that payments will continue.).