Does Filing Bankruptcy Protect You From L&I?

From time to time, I’ll have clients come to me with a final Department of Labor & Industries (L&I) assessment so large that they contemplate shutting down their business and filing bankruptcy as a way to shield themselves from liability. The stark reality, however, is that bankruptcy doesn’t protect you from L&I liability. Indeed, L&I debt is one debt that sticks to you, even through bankruptcy, and that can pop up at an inopportune time.

Just recently, I was contacted by a potential client who assumed he was free and clear of an L&I assessment from five years ago, only to find out that L&I is now seeking to take nearly $100K of his inheritance to pay a dormant debt.

Below is a brief summary of how L&I seeks to collect on debts, and how collection activity can follow you for years before the big strike.

When an assessment becomes final, L&I’s collections department will begin taking steps to collect on the debt. Collection action may include any or all the following:

  • Garnishing (withdrawing funds from) your company’s bank account
  • Collecting accounts receivable due to your company i.e. ordering your clients to pay funds owed to you directly to L&I.
  • Placing tax warrants/liens on company property (this prevents refinances/resale of the company)
  • Revoking/suspending your business and/or contractor licenses

If your company/LLC has no funds or assets that would allow collection via the above means, or if you’ve moved assets out of your company accounts, L&I may then seek to collect the amount from you personally. There is a legal mechanism they follow to do this (i.e. issuance of Notice of Corporate Officer Liability), along with an opportunity for you to appeal any attempt to hold you personally liable. If after that dance, it is ultimately determined that you owe the amount personally, then L&I would be able to do the following:

  • Garnish your wages, if you were employed (maximum amount is 25% of your wages
  • Garnish your personal bank account
  • Place tax warrants/liens on your property which would prevent refinancing or sale of such property, or result in L&I’s seizure of such property.

As a practical matter, will L&I go scorched earth via the above to collect on owed debts? Sometimes it does. Sometimes it determines that it is not worth it to try to collect, and will move the debt into “uncollectible” status. But even when in uncollectible status, L&I may get wind of funds coming to you (as in the inheritance case above), and spring into action.

Because you can’t safely run from an L&I debt, I encourage my clients to do what you can to get your L&I debt lowered (even if it’s an amount that you don’t know if you’ll be able to repay). And once lowered, do what you can to pay. Otherwise, get comfortable looking over your shoulders, or getting your pocket picked, so to speak.

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