Chapter Court docket Holds EITC Refunds Are Not Exempt From Collectors In Chapter


The intersection of taxes and chapter current fascinating points. A latest chapter case demonstrated this by contemplating whether or not Earned Earnings Tax Credit score refunds (and their New Mexico state equivalents) will be exempt from collectors in a chapter continuing. The case reveals how the reply can rely upon the place you reside! On this case, below New Mexico regulation, the chapter courtroom held that these refunds weren’t typically exempt from collectors.

Within the case, the debtor was entitled to tax refunds, which had been partly attributable to the Earned Earnings Tax Credit score (EITC) and a New Mexico model, the Working Households Tax Credit score. Because the courtroom defined, these credit are “supposed to offer financial reduction to low-income heads of family who work.”

The debtor listed the tax refunds below the state’s “wildcard” exemption, which permits a debtor to decide on what property to exempt; nonetheless, the wildcard exemption right here had a restrict of $500. The chapter trustee ultimately objected to the claimed exemptions to the extent they exceeded the $500 restrict.

This put up will take into account two of the arguments made in response to the trustee’s objection. First, that the EITC tax refunds weren’t a part of the chapter property. Second, that the EITC tax refunds had been exempt. The courtroom finally disagreed with each arguments.

The chapter courtroom first thought-about the character of the 2 tax refunds at challenge: the federal Earned Earnings Tax Credit score and the New Mexico Working Households Tax Credit score.

The courtroom defined that the “EITC is a refundable tax credit score designed to assist low-income people who work and earn an earnings.” In contrast to different tax refunds, which are sometimes attributable to tax overpayments through the 12 months, the courtroom famous that “the EITC can create a refund bigger than the quantity of tax paid all year long.”

The courtroom defined the genesis and function of the EITC: “[1] to scale back the disincentive to work brought on by the imposition of Social Safety taxes on earned earnings . . . , [2] to stimulate the economic system by funneling funds to individuals prone to spend the cash instantly, and [3] to offer reduction for low-income households damage by rising meals and power costs.” (quoting Sorenson v. Sec’y of the Treasury, 475 U.S. 851, 864 (1986)). Certainly, the courtroom continued, “[a]fter quite a few expansions, the EITC is regarded by many as the most important federal anti-poverty program in the USA.” (quoting In re Murray, 506 B.R. 129, 134 (tenth Cir. BAP 2014), aff’d, 586 F. App’x 477 (tenth Cir. 2014)).

Notably, although, the courtroom additionally defined that “[d]espite its anti-poverty function, Congress has not enacted exemptions for EITC refunds just like the protections for Social Safety advantages below 42 U.S.C. § 407 and veterans’ advantages below 38 U.S.C. § 5301(a).”

The courtroom then defined the New Mexico Working Households Tax Credit score, which the courtroom dubbed New Mexico’s model of the EITC. In a nutshell, the courtroom defined that “[f]or the 2021 tax 12 months, the New Mexico EITC is the same as twenty % (20%) of a person’s federal EITC.”

Subsequent, the courtroom thought-about whether or not the tax refunds had been property of the chapter property.

In chapter, the graduation of the case creates the “chapter property” below 11 U.S.C. § 541. Briefly, the chapter property comprises, with some exceptions, “all authorized or equitable pursuits of the debtor in property as of the graduation of the case.” 11 U.S.C. § 541(a)(1). Right here, the chapter courtroom cited to tenth Circuit precedent that held that “a debtor’s EITC—pro-rated to the date of submitting of the chapter petition—is property of the property.”

Based mostly on this, the courtroom concluded that the federal and state tax refunds had been property of the chapter property.

The courtroom subsequent turned to the New Mexico exemptions. In chapter, the debtor is allowed to “exempt” sure property, which implies the property will not be topic to (i.e., is exempt) from the claims of collectors. The exemptions are primarily based on state regulation and thus fluctuate from state to state. Right here, due to this fact, the courtroom thought-about the relevant New Mexico exemptions.

On this case, the debtor was utilizing the state “wildcard” exemption, however as famous above, that had a $500 restrict, which the tax refunds exceeded (and the trustee was objecting to the quantity claimed in extra).

The courtroom defined that some states have expressly handed statutes that exempt EITC refunds from collectors. For instance, Colorado regulation exempts “[t]he full quantity of any federal or state earnings tax refund attributed to an earned earnings tax credit score or any youngster tax credit score, whether or not as a refundable tax credit score or as a nonrefundable discount in tax” (Colo. Rev. Stat. § 13-54-102(1)(o)), and Nebraska regulation gives “[i]n chapter and within the assortment of a cash judgment, the total quantity of any federal or state earned earnings tax credit score refund shall be exempt from attachment, garnishment, or different authorized or equitable course of and from all claims of collectors.” (Neb. Rev. Stat. § 25-1553.)

Right here, in distinction to these states, the courtroom emphasised that “New Mexico has not completed so.”

The courtroom additionally thought-about a statutory exemption for sure public help advantages. The courtroom defined that some states have exemptions that apply to public help advantages. Regardless that the courtroom concluded that the EITC refunds had been public help, the courtroom careworn the restricted nature of New Mexico’s public help exemption. The New Mexico statute supplied that “[a]ssistance granted below this act shall not be transferable or assignable, at regulation or in fairness, and not one of the cash paid or payable below this act shall be topic to execution, levy, attachment, garnishment or different authorized course of, or to the operation of any chapter or insolvency regulation.” (N.M. Stat. Ann. § 27-2-21.)

In decoding this statute, although, the courtroom famous that the exemption applies solely to “cash paid or payable below this act.” Thus, it didn’t exempt the federal or state EITC as a result of neither had been paid below the New Mexico Public Help Act.

Consequently, the courtroom concluded that “federal EITC and New Mexico Working Households Tax Credit score, regardless of having an anti-poverty function, should not exempted from the claims of collectors below the New Mexico Public Help Act or some other New Mexico exemption aside from New Mexico’s $500 wildcard exemption.”

In conclusion, this case demonstrates an intersection of tax and chapter regulation. Furthermore, it reveals how the chapter results of tax objects—right here, tax refunds—can fluctuate relying on the state of the chapter.

The case is In re Medina, No. 22-10233-j7 (Bankr. D.N.M. Dec. 16, 2022).

That is solely a abstract of the case and a few parts—together with details, points, or evaluation—could have been omitted or edited; should you want recommendation on this space, please evaluate the case in its entirety and seek the advice of an legal professional.


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