Severance pay verses unemployment compensation was the subject of a recent Chapter 7 decision in United Stated Bankruptcy Court by Judge Feeney.
In this case, the Chapter 7 debtor claimed that his weekly severance checks were exempt under the “fresh start” law. The Court considered the “present unemployment in the Commonwealth of Massachusetts” as a significant factor.
In the old days, severance pay was not usually exempt. However, the Court’s view of the current unemployment rate played into this decision. There are two different exemptions that the Court considered: the severance pay as an “unemployment benefit” under one potential exemption and the pay as “contract on account of…length of service…for support of the debtor” under another exemption. In this case, the Court decided an evidentiary hearing was necessary to determine if the severance pay is indeed exempt, stating that the issue must be resolved on a “case by case basis.”