Part two of a three-part guest post series on bankruptcy and workers compensation by Robert Aurbach, CEO of Uncommon Approach.
The last posting introduced Joe, the injured employee of a self-insured employer, and discussed the ways the workers' compensation system failed him when the employer filed for Federal Bankruptcy protection. It's important to understand the reasons why this happens to understand the current proposal for fixing the problem.
How the Law Victimizes Joe
First, it's important to understand that Federal Bankruptcy law pre-empts any state law that conflicts with it. This makes the power of state regulators attempting to preserve the benefits of injured workers under state law extremely limited. In this context, it is necessary to understand that the Bankruptcy Code treats workers' compensation claims as having fully accrued on the date of injury ― that is to say that the claim is treated as being fully defined the day it happens. Several things happen as a result. Workers' compensation claims are then separated into "pre-petition" and "post-petition" claims, and the two groups are handled completely differently. Pre-petition claims are thrown into the bankruptcy proceedings, frozen for an indefinite time and then, when the bankruptcy proceedings are over, completely "discharged" by whatever distribution the Bankruptcy Court approves. Joe's claim accrued before bankruptcy petition was filed and that's why his benefits were frozen, his medical dispute "stayed" and his case delayed while the rest of the complicated bankruptcy case played out in front of a court in a distant city.
On the other hand, workers' compensation claims that arise during the bankruptcy case do not face any of those disabilities. Thus, the date on which two similarly situated coworkers are disabled is critical to the determination of the way the current Bankruptcy Code will treat their claims, despite the fact that the states have promised all workers mandated to participate in the system that they will be treated the same, and the fact that both employees may be left with life-long injuries or illnesses.
Another factor affects Joe's claim. When a Petition for protection is filed in Bankruptcy Court, it issues an "automatic stay" that freezes every other court proceeding, no matter where located, in which the debtor company is involved. This means that Joe can't use state dispute resolution mechanisms, unless and until the Bankruptcy Court issues an order allowing it. This forces him to appear in front of a strange court, often in a distant city, with specialized rules and lawyer admission requirements, in front of a judge who is likely to be unfamiliar with state workers' compensation law.
A Surgical Solution
The solution for this grim, and plausible scenario is simple and causes minimal disruption of the overall bankruptcy scheme. The most important change is to redefine when the workers' compensation claim accrues. By making each wage or medical benefit accrue when it is due and payable in the normal course of workers' compensation claims administration, the claimant will only have those benefits that are already delinquent at the time the bankruptcy petition is filed be caught up in the bankruptcy system. As new medical and indemnity benefits become due, they will arise "post-petition" and avoid both the court's freeze and the wiping out of debts at the end of the case (assuming the debtor successfully reorganizes), because they will have the status of "new" debts, as they are accrued. This treatment is also consistent with the current treatment of medical and disability plan payments for ill, injured and disabled workers that were not hurt on the job.
In addition, explicit treatment of workers' compensation benefits accruing postpetition as "administrative" expenses of the debtor during bankruptcy will ensure that they are paid during the case.
Finally, adjudication of determinations relating to such benefits should be exempted from the "automatic stay" so that they can be adjudicated as usual, avoiding the economic burden for the employee to appear in the bankruptcy court, while allowing for the agency and court with the specialized expertise under applicable state law to do its job.
By these small, surgical changes, the harsh and inequitable effects of bankruptcy on these involuntary workers' compensation debtors can be avoided, and the need for more intrusive and burdensome regulatory oversight and security requirements to offset or forestall the effects of bankruptcy can be lessened.
The Effect of the Proposed Changes
Under the new proposed law, any of Joe's unpaid benefits at the time the bankruptcy is filed will be thrown into the bankruptcy proceedings. But as soon as the bankruptcy is filed, his benefits can start again. The local administrative authority will decide the medical dispute in his claim, and he will not need a lawyer admitted to bankruptcy court to get the treatment he needs to return to work. Assuming that the company successfully reorganizes, any long-term medical benefit eligibility that he may get from permanent injury will be preserved. The state's promise to Joe is fulfilled ― and the Company doesn't have the option of walking away from its injured workers as if they were standard commercial debts.
The final chapter: Security deposits, guaranty funds and what the proposed solution doesn't fix.