Missouri Bankruptcy: Tax Refund Credits Protected

18 Apr Missouri Bankruptcy: Tax Refund Credits Protected

IRS wheres_my_refund_engMissouri bankruptcy filers have more protection for their tax refunds now. Particularly working families have more certainty their financial needs won’t be disrupted when they need to file Chapter 7.

Last year the Missouri legislature unanimously passed a bill that, among other things, provided an exemption for a “public assistance benefit.” I theorized at the time that this would lead to protection of earned income tax credits in bankruptcy cases. On April 2, 2013, Judge Arthur Federman agreed.

The earned income credit is a large proportion of the average working family — particularly lower income family — income tax refund each year. It is not a refund of money you have paid into the Treasury, it is a refundable amount of money you qualify for if you have children and wages within certain ranges. Losing these refunds amounted to a pay cut for consumers, not just the loss of a potentially-unnecessary thing.

In Corbett, Federman dealt with a trustee’s objection to the new exemption. The trustee argued that the legislature did not explicitly identify “earned income tax credit” or reference the tax code provision that creates these credits. So the amendment did not actually protect EITC since the 8th Circuit’s Benn decision seemed to require specific identification. The trustee also in effect argued that EITC is not a “public assistance benefit.”

The judge overruled the trustee and held that the EITC is a public benefit program, in line with virtually all other decisions on the subject. He also declined to interpret Benn to require the legislature to name with hyper-specificity each asset that a person can protect in bankruptcy, or lose it to the trustee. He pointed out that “tools of trade” or unemployment benefits” are not described by statutory title but by general purpose, identifying the function of the thing, and leaving it to courts to flesh out the application of the law.

Assuming that other judges in Missouri will follow suit, it looks like working families can take a little more comfort in knowing they will keep most or all of their tax refunds at this time of year. For a long time, it has been a tough choice for those families because they had to wait to get their refunds or give them up when seeking help for their debt problems. It’s good news for folks trying to do the right things — like raising a family, going to work — but find they just can’t stay on top of their bills anymore.

In re Corbett, #13-60042 (Bankr.W.D.Mo. 4/2/13)


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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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