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Court shields workers comp settlement, Medicare set-aside in bankruptcy

Court shields workers comp settlement, Medicare set-aside in bankruptcy

A worker who used his workers compensation settlement and Medicare set-aside account funds to buy real estate and a new truck will not have to include those items as assets under his Chapter 7 bankruptcy proceedings, a federal bankruptcy judge ruled this week.

Jesus Arellano, 44, broke his hip while working for an unidentified employer in 2010, according to court filings in the U.S. Bankruptcy Court in Wilkes-Barre, Pennsylvania. He settled a workers comp claim related to the injury for $225,000 in workers comp benefits, as well as $72,742 placed into a Medicare set-aside account for future medical treatment.

The federal Medicare Secondary Payer Act requires self-insured employers and insurers to act as primary payers for workers comp and liability claims involving Medicare beneficiaries. U.S. Centers for Medicare and Medicaid Services advises workers comp payers to set up Medicare set-aside accounts to pay for future medical costs for a beneficiary's injury, but beneficiaries aren't required to use the funds for their health care.

After receiving the settlement and Medicare set-aside funds in January 2012, Mr. Arellano used the money to buy a 2005 Ford F-150 truck and two properties in York, Pennsylvania, court records show. Mr. Arellano later sold one of the properties to his brother under an installment payment agreement, under which his brother is slated to pay $1,200 a month until June 2020.

Mr. Arellano filed for Chapter 7 bankruptcy protection in March 2014, but asked for the truck, the two properties and remaining money from his workers comp settlement to be exempted from bankruptcy proceedings, records show. He did not disclose in court filings the installment agreement between him and his brother for one of the properties, nor the fact that he is receiving income from that agreement.

The trustee in Mr. Arellano's bankruptcy case objected to Mr. Arellano's exemption request, contending in court filings that bankruptcy laws did not allow Mr. Arellano to exempt property that was the proceeds of a workers comp claim.

However, Mr. Arellano countered in part that the exemption should be allowed under bankruptcy law because the property and related workers comp payments represented “a payment in compensation of loss of future earnings” that is used to reasonably support Mr. Arellano and his dependents, filings show.

On Monday, federal bankruptcy court Judge Mary D. France agreed with Mr. Arellano and found that his properties and workers comp settlement funds should be exempted from bankruptcy proceedings. In her ruling, Judge France said the workers comp settlement funds are reasonably necessary to support Mr. Arellano's family.

That finding was based in part on the fact that Mr. Arellano is now unemployed, that his wife “has a low-wage job at a fast-food restaurant” and that two of their three children are under the age of 18. Additionally, the judge said that while interest that Mr. Arellano's brother is paying on one of the properties could be considered income, it is “sufficiently modest as to have a negligible impact” on Mr. Arellano's bankruptcy case.

Mr. Arellano “purchased a modest home for his family and a 2005 truck,” the ruling reads. “The second parcel of real property purchased with the proceeds of his workers' compensation settlement was acquired as an investment. With the payments made by his brother on the installment agreement, (Mr. Arellano) has monthly disposable income of $705.11…”

Judge France also found that Mr. Arellano's Medicare set-aside fund should not be included in bankruptcy proceedings because it was slated for Mr. Arellano's medical expenses — even though he didn't use it for that purpose — and is “not property of the bankruptcy estate.”

“Because I find that the (Medicare set-aside) payment was to be held in trust for the benefit of providers of medical services related to (Mr. Arellano's) workers' compensation claim, I find that the (set aside) is not property of Debtor's bankruptcy estate and, as such, may not be administered by the Trustee for the benefit of creditors,” the decision reads.

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