Illinois Workers’ Comp Settlement Proceeds Exempt

Posted by NCBRC - January 28, 2020

Answering a question certified to it from the Seventh Circuit Court of Appeals, the Illinois Supreme Court held that, under Illinois law, “the proceeds of a workers’ compensation settlement are still exempt from the claims of medical-care providers who treated the illness or injury associated with that settlement,” notwithstanding 2005 amendments to the Workers’ Compensation Act. In re Hernandez, 2020 IL 124661 (Sup. Ct. Ill. Jan. 24, 2020). The Seventh Circuit found “that authoritative holding of the state supreme court is dispositive. The proceeds of Hernandez’s workers’ compensation settlement are exempt from the claims of the healthcare providers who treated her workplace injuries.” In re Hernandez, No. 18-1789 (7th Cir. Feb. 11, 2020).

Elena Hernandez filed for chapter 7 bankruptcy owing over $120,000.00 in medical bills incurred for treatment of work injuries. In her bankruptcy schedules she listed a pending workers’ compensation claim. Shortly after filing her petition, and without consulting the bankruptcy trustee, Ms. Hernandez settled the workers’ compensation claim with her employer for approximately $30,000.00. Ms. Hernandez maintained that, under the state Workers’ Compensation Act (WCA), the settlement was exempt from liability to creditors. Her medical creditors objected to the exemption arguing that 2005 amendments to the Illinois exemption law had made such settlements accessible to health care providers. The creditors also argued that the settlement was the product of fraud.

The bankruptcy court sustained the objection on process grounds rather than on application of the Illinois exemption. Affirming, the district court relied on its interpretation of the 2005 amendments to the state WCA. On appeal to the Seventh Circuit, (case no. 18-1789), that court determined that both sides offered seemingly valid interpretations of the exemption statute. It certified the question to the state supreme court.

At the outset, the Illinois Supreme Court noted generally that state exemption law in general consists of any “provision [that] unequivocally protects the identified property against all forms of collection.” Turning to the specific provision relied on by Ms. Hernandez, the Illinois Workers’ Compensation Act (WCA), 820 ILCS 305/21, provides:

“No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages, except the beneficiary or beneficiaries of a deceased employee who was a member or annuitant under Article 14 of the ‘Illinois Pension Code’ may assign any benefits payable under this Act to the State Employees’ Retirement System.”

Finding no ambiguity in the terms of the provision, the court described it as a “paradigm” exemption.

The court went on to address the creditors’ argument that when the state legislature amended section 8 of the Act it created an implied exception to section 21’s exemption with respect to health care providers. The creditors pointed to provisions relating to fee schedules as suggesting generally that the legislature intended to ensure that health care providers recover payments they are owed. In addition, the creditors pointed to section 8.2, which added the language: “Upon . . . a settlement agreed to by the employer and the employee, a provider may resume any and all efforts to collect payment from the employee for the services rendered to the employee,” as indicating the legislature’s intent to allow providers to collect from settlement proceeds.

The court disagreed. It noted that the state legislature had created explicit exceptions to section 21 both within that provision and in a separate provision dealing with child support debts. On the other hand, the 2005 amendments did not clearly create another exception. Taken in conjunction with the historical application of the exemption to instances such as the one at bar, the court found no evidence of legislative intent to repeal the exemption by implication.

With respect to section 8.2, the court found the provision merely allows health care creditors to resume collection efforts directly from employees after a settlement is reached, it does not address the funds to which the creditors are entitled. The court found that if section 8.2 permitted creditors to go after settlement proceeds it would be in irreconcilable conflict with section 21.

Based on the State Supreme Court’s clarification of its exemption law, the circuit court reversed.

NACBA filed an amicus brief in support of the debtor in the state supreme court.

Hernandez 7th Cir Feb 2020

Hernandez Sup Ct Ill Jan 2020



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