Answer

Greetings,

If you have a claim pending for any disability benefits you should list the claim as an asset in your bankruptcy schedules and discuss with your attorney whether you can exempt the pending claim and any money you may be paid for future benefits or back pay.

Once you cash a check it may become an asset that can be taken by the trustee of the bankruptcy estate like other cash on hand or bank account balances; but there is support in case law for a disablity settlement to remain exempt (at least one from an insurance company).

In re Alam (Dec. 29, 2006), Sixth Circuit Case No. 05-8091 held that a settlement payment made by a disability insurer is exempt from bankruptcy under ORC 2329.66. ORC 2329.66 creates an exemption for benefits and lump sum payments under sickness and accident insurance policies, but does not specifically mention settlements. The court also held that the settlement payments are still exempt from bankruptcy, even though the funds were reinvested in mutual funds and money market accounts. However, the settlement payment may not be exempt in its entirety because ORC 3923.19 limits the exemption to the amount of a lump sum payment made under the insurance policy or $600 per month. In Alam, the parties agreed that the settlement payment was not a lump sum payment made under the terms of the policy.

You should not cash any disability checks without direction from your bankruptcy attorney.

I hope this helps in your efforts to keep the back disability pay exempt.

Expert:	John Gordos EA
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Answered:	11/10/2007

Enrolled Agent

I have prepared individual, trust, partnership, and corporate taxes since 1987.