Debtors Keep EICT, Bankruptcy Only Exemption Constitutional Kansas Judge Rules

09 Apr Debtors Keep EICT, Bankruptcy Only Exemption Constitutional Kansas Judge Rules

Bankruptcy debtors keep one year of earned income tax credits from their creditors. The new Kansas law allowingthe EITC exemption has survived its first constitutional challenge. By definition, debtors who receive earned income tax credits are low-income workers, typically single parents with small children.

In a 51-page decision, Judge Janice Miller Karlin of the U.S. Bankruptcy Court for the District of Kansas overruled the chapter 7 bankruptcy trustee’s attack on the exemption law (K.S.A. 60-2315) available to low-income taxpayers only in bankruptcy proceedings, but not generally in debt collection cases. In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012).

The trustee, Darcy Williamson of Topeka, challenged the Kansas exemption law in cases since the law took effect April 14, 2011. She asserts that the state statute violates the Uniformity and Supremacy Clauses of the U.S. Constitution. An appeal by the bankruptcy trustee is anticipated.

Under previous law, the bankruptcy debtors’ income tax refunds and the earned income tax credits were turned over to the chapter 7 bankruptcy trustee who kept 25% commission, paid herself attorneys fees and expenses, and then paid what was left over to creditors. Generally, the distribution to creditors was a small fraction of what was owed, often a penny or two on the dollar.

The Kansas Attorney General intervened in the challenge to support the constitutionality of the statute. The National Association of Consumer Bankruptcy Attorneys (NACBA) filed a friend of the court brief in support of the debtors. Fellow chapter 7 trustee Robert Baer filed an amicus brief in support of Williamson.

Uniformity Clause

Article I, 8, clause 1
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and
provideforthecommon defense and general welfare of the United States; but all duties, imposts and
excises shall be uniformthroughout the United States;

“Because the Kansas exemption statute is a state, rather than a federalenactment on the subject of bankruptcy, this Court finds no Uniformity Clauseviolation,” Judge Karlin ruled.

Supremacy Clause

Article VI, clause 2
This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or
which shall be made, under the authority of the United States, shall be the supreme law of the land;and the judges
in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.

 

“In addition, because of the concurrent nature of state/federal authority inbankruptcy, and because the Trustee has shown no express conflict between theexemption statute and the Bankruptcy Code, nor an implied conflict between the given exemption and the language and goals of the Bankruptcy Code, the Court finds no Supremacy Clause violation.” Judge Karlin concluded.

Earned income tax credits were enacted during the Ford administration and reenacted by Ronald Reaganwho hailed the EICT program as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

Here is an update on the appeal of Judge Karlin’s decision in the Bankruptcy Appellate Panel for the 10th Circuit.
 

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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