diff --git a/implementation/src/llm/handler.rs b/implementation/src/llm/handler.rs
index 76b843a..eb599f1 100644
--- a/implementation/src/llm/handler.rs
+++ b/implementation/src/llm/handler.rs
@@ -20,6 +20,10 @@ pub struct Inner {
     genvm_id: genvm_modules_interfaces::GenVMId,
 }
 
+#[cfg(test)]
+#[path = "handler_test.rs"]
+mod tests;
+
 type LlmSubContext = crate::manager::execution_context::LlmSubContext;
 
 pub struct Provider {
@@ -180,28 +184,31 @@ impl Inner {
         Ok(llm_iface::PromptAnswer { data, consumed_gen })
     }
 
-    fn try_catch_budget_exhausted(err: anyhow::Error) -> ModuleResult<llm_iface::PromptAnswer> {
-        if err
-            .downcast_ref::<crate::common::BudgetExhausted>()
-            .is_some()
-        {
-            return Ok(llm_iface::PromptAnswer {
-                data: llm_iface::PromptAnswerData::Text(String::new()),
-                consumed_gen: primitive_types::U256::MAX,
-            });
+    fn is_budget_exhausted(err: &(dyn std::error::Error + 'static)) -> bool {
+        // `scripting::call_fn` unwraps top-level `ExternalError`/`WithContext` into an `Arc`
+        if let Some(ext) = err.downcast_ref::<Arc<dyn std::error::Error + Send + Sync>>() {
+            return Self::is_budget_exhausted(&**ext);
         }
-        if let Some(mlua::Error::ExternalError(ext)) = err.downcast_ref::<mlua::Error>() {
-            if ext
-                .downcast_ref::<crate::common::BudgetExhausted>()
-                .is_some()
-            {
-                return Ok(llm_iface::PromptAnswer {
-                    data: llm_iface::PromptAnswerData::Text(String::new()),
-                    consumed_gen: primitive_types::U256::MAX,
-                });
-            }
+        if let Some(cause) = err.downcast_ref::<Arc<mlua::Error>>() {
+            return Self::is_budget_exhausted(&**cause);
+        }
+        match err.downcast_ref::<mlua::Error>() {
+            // walks `CallbackError`, `BadArgument`, `WithContext` and `ExternalError` wrappers
+            Some(lua_err) => lua_err
+                .chain()
+                .any(|e| e.is::<crate::common::BudgetExhausted>()),
+            None => err.is::<crate::common::BudgetExhausted>(),
+        }
+    }
+
+    fn try_catch_budget_exhausted(err: anyhow::Error) -> ModuleResult<llm_iface::PromptAnswer> {
+        if !err.chain().any(Self::is_budget_exhausted) {
+            return Err(err);
         }
-        Err(err)
+        Ok(llm_iface::PromptAnswer {
+            data: llm_iface::PromptAnswerData::Text(String::new()),
+            consumed_gen: primitive_types::U256::MAX,
+        })
     }
 
     async fn exec_prompt(
diff --git a/implementation/src/llm/handler_test.rs b/implementation/src/llm/handler_test.rs
new file mode 100644
index 0000000..b3928d8
--- /dev/null
+++ b/implementation/src/llm/handler_test.rs
@@ -0,0 +1,107 @@
+use super::Inner;
+
+#[tokio::test]
+async fn budget_exhaustion_from_lua_callback_becomes_timeout_sentinel() -> anyhow::Result<()> {
+    let direct = Inner::try_catch_budget_exhausted(anyhow::Error::from(mlua::Error::external(
+        crate::common::BudgetExhausted,
+    )))?;
+    assert_eq!(direct.consumed_gen, primitive_types::U256::MAX);
+
+    let lua = mlua::Lua::new();
+    lua.globals().set(
+        "exhaust",
+        lua.create_async_function(|_, ()| async {
+            Err::<(), mlua::Error>(mlua::Error::external(crate::common::BudgetExhausted))
+        })?,
+    )?;
+
+    let call = lua
+        .load("return function() exhaust() end")
+        .eval::<mlua::Function>()?;
+    let err = call
+        .call_async::<()>(())
+        .await
+        .expect_err("budget must exhaust");
+    assert!(
+        matches!(
+            err,
+            mlua::Error::CallbackError { ref cause, .. }
+                if matches!(cause.as_ref(), mlua::Error::ExternalError(ext)
+                    if ext.downcast_ref::<crate::common::BudgetExhausted>().is_some())
+        ),
+        "expected Lua callback to wrap BudgetExhausted, got {err:?}"
+    );
+
+    let answer = Inner::try_catch_budget_exhausted(anyhow::Error::from(err))?;
+    assert_eq!(answer.consumed_gen, primitive_types::U256::MAX);
+    assert!(matches!(
+        answer.data,
+        genvm_modules_interfaces::llm::PromptAnswerData::Text(ref text) if text.is_empty()
+    ));
+    Ok(())
+}
+
+#[tokio::test]
+async fn budget_exhaustion_survives_lua_rethrow() -> anyhow::Result<()> {
+    let lua = mlua::Lua::new();
+    lua.globals().set(
+        "exhaust",
+        lua.create_function(|_, ()| -> mlua::Result<()> {
+            Err(mlua::Error::external(crate::common::BudgetExhausted))
+        })?,
+    )?;
+
+    let call = lua
+        .load(
+            r#"
+            local function inner() exhaust() end
+            return function()
+                local ok, err = pcall(inner)
+                if not ok then error(err, 0) end
+            end
+            "#,
+        )
+        .eval::<mlua::Function>()?;
+    let err = call
+        .call_async::<()>(())
+        .await
+        .expect_err("budget must exhaust");
+
+    let answer = Inner::try_catch_budget_exhausted(anyhow::Error::from(err))?;
+    assert_eq!(answer.consumed_gen, primitive_types::U256::MAX);
+    Ok(())
+}
+
+#[test]
+fn budget_exhaustion_unwrapped_by_call_fn_becomes_timeout_sentinel() -> anyhow::Result<()> {
+    let ext: std::sync::Arc<dyn std::error::Error + Send + Sync> =
+        std::sync::Arc::new(crate::common::BudgetExhausted);
+    let answer = Inner::try_catch_budget_exhausted(anyhow::Error::from(ext))?;
+    assert_eq!(answer.consumed_gen, primitive_types::U256::MAX);
+
+    let cause = std::sync::Arc::new(mlua::Error::CallbackError {
+        traceback: String::new(),
+        cause: std::sync::Arc::new(mlua::Error::external(crate::common::BudgetExhausted)),
+    });
+    let answer =
+        Inner::try_catch_budget_exhausted(anyhow::Error::from(cause).context("exec_prompt"))?;
+    assert_eq!(answer.consumed_gen, primitive_types::U256::MAX);
+    Ok(())
+}
+
+#[tokio::test]
+async fn unrelated_lua_callback_error_is_not_budget_exhaustion() -> anyhow::Result<()> {
+    let lua = mlua::Lua::new();
+    lua.globals().set(
+        "fail",
+        lua.create_function(|_, ()| -> mlua::Result<()> { Err(mlua::Error::runtime("boom")) })?,
+    )?;
+
+    let call = lua
+        .load("return function() fail() end")
+        .eval::<mlua::Function>()?;
+    let err = call.call_async::<()>(()).await.expect_err("must fail");
+
+    assert!(Inner::try_catch_budget_exhausted(anyhow::Error::from(err)).is_err());
+    Ok(())
+}