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Collecting Workers' Compensation Claims After BankruptcyWhen can a creditor claim a workers’ compensation award from a debtor who has filed for bankruptcy in Illinois? That question is at the heart of a recent case that is heading to the Illinois Supreme Court. In the case of In re Elena Hernandez, the debtor filed for Chapter 7 bankruptcy. Among her debts were more than $100,000 that she owed to healthcare providers for treating a work-related injury. She claimed a bankruptcy exemption for her $31,000 workers’ compensation settlement. The healthcare creditors contested the exemption, stating that it unreasonably undermines their ability to collect on the debt. Both the bankruptcy court and a circuit court agreed with the creditors, but the appellate court saw enough evidence on both sides of the argument to ask Illinois’ highest court to make a definitive ruling.

Workers’ Compensation and Debt

A workers’ compensation claim is meant to cover the actual cost of an employee’s work-related injury, including:

  • Healthcare provider expenses;
  • Missed pay from time off work; and
  • The loss of earning potential due to disability.

Thus, one of the primary purposes of workers’ compensation is to ensure that healthcare providers are paid for their services. Illinois law requires employers to directly pay providers for all undisputed healthcare bills. Employers may dispute whether an employee’s injury qualifies for workers’ compensation or whether a certain treatment was a necessary expense. Creditors can hold a patient liable for payment when the employer disputes a bill.

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Confusion When Collecting from Divorced CouplesA couple going through a divorce must divide their debts as well as their assets. Each spouse takes responsibility for paying off a portion of the marital debt, such as a:

  • Mortgage;
  • Credit card balance;
  • Personal loan; or
  • Medical bill.

Divorcees may mistakenly believe that they are not liable for the debts that their former spouse assumed. As a creditor, you are not bound by the terms of a divorce agreement and have the right to pursue repayment of the debt from either spouse after the divorce.

Loan Contract vs. Divorce Agreement

You can give a clear explanation to a debtor who argues that the debt belongs to his or her former spouse:

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Banker's Options When Debtor Files for BankruptcyA bank must pause its efforts to collect a debt or foreclose on a property if the debtor files for bankruptcy. The automatic stay is one of the most powerful tools that a debtor has during bankruptcy. The stay expires after 30 days, but the debtor can file for an extension. As a bank, your priority when a client files for bankruptcy is to protect yourself and try to recuperate the debts owed to you. There are several actions you should consider.

Freezing Account

The automatic stay prevents you from withdrawing money from a bankruptcy filer’s account in order to offset debt. However, you can freeze your client's bank account in order to:

  • Protect the money from a bankruptcy trustee; or
  • Hold onto the money until you are able to offset it.

The trustee may order you to release the portion of the bank account that will be exempt from the bankruptcy. It may take weeks for the trustee to make this determination, which buys you time to pursue legal action.

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Bankruptcy Law Allows Debtors to Continue Retirement ContributionsA Chapter 13 bankruptcy trustee in Illinois recently objected to a debtor’s request to exclude $200 per month from his disposable income in order to contribute to his 401K retirement plan. The trustee questioned the motivation of the decision because the debtor had not made any contributions to the plan in the six months prior to filing for bankruptcy. However, an Illinois bankruptcy court denied the objection, stating that the debtor was within his rights. The ruling shows how bankruptcy courts treat retirement plan contributions as a protected expenditure.

Chapter 13 Plans

As opposed to Chapter 7 bankruptcy, Chapter 13 bankruptcy involves creating a repayment plan instead of liquidating assets. Qualified debtors must submit documents that detail their:

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Involuntary Bankruptcy Useful in the Right SituationsDebtors who lack the means to repay creditors protect themselves by filing for bankruptcy. They can liquidate assets or create reorganization plans, after which their remaining debts may be discharged. Though creditors may be unable to retrieve their full debts, they are often forced to cooperate with the debtor in the bankruptcy to retrieve what they can. However, creditors have the ability to initiate bankruptcy with uncooperative debtors. Involuntary bankruptcy is a lesser-used debt retrieval method because it only benefits creditors in certain situations.

Filing for Involuntary Bankruptcy

There are several requirements when using involuntary bankruptcy against a debtor:

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U.S. Supreme Court Rules in Favor of Creditors Making Stale ClaimsThe creditor industry scored a victory in May when the U.S. Supreme Court ruled that creditors are not violating the Fair Debt Collection Practices Act when they file a stale claim during a debtor’s chapter 13 bankruptcy proceedings. The 5-3 decision overturned a lower court ruling that such claims were unfair and deceptive. The decision removes some of the burden on creditors for determining when the statute of limitations for claiming a debt has expired, and protects them from debtor lawsuits that claim they violated the FDCPA.

Stale Claims

Creditors may have an unlimited time to attempt to collect a debt, but there is a limited time period during which they can use court action. When a creditor attempts to use legal action to collect on a debt that has passed that deadline, it is known as a stale claim. The statute of limitations varies by state, and creditors with debtors in multiple states may find it difficult to keep track of the different deadlines. In Illinois, the deadlines for court action are:

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How Bankruptcy Affects Debt CollectionBankruptcy is one of a debtor’s most powerful tools to avoid paying off debt owed to a creditor. If granted bankruptcy, debtors may be able to absolve themselves from responsibility for some of their debts. When a debtor files for bankruptcy, the court can place an automatic stay on the creditor’s debt collection efforts until it decides on the bankruptcy case. Creditors can object to the automatic stay or the bankruptcy claim. Creditors have two types of bankruptcy they most often deal with, each having a different effect on their ability to collect debts.

Chapter 7

Chapter 7 bankruptcy is considered favorable for debtors who do not own many high-value assets. In order to qualify for this form of bankruptcy, the debtor:

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