EITC Exemption Update


We have two updates for you in the ongoing fight in Kansas for the right to keep one year’s worth of earned income tax credit in bankruptcy.

Kansas Bankruptcy Trustee Appeals

Earlier this month, the Bankruptcy Appellate Panel affirmed the Topeka bankruptcy judge’s ruling that the debtors could keep their EITC.  On February 13, 2013, the bankruptcy trustee appealed that decision to the 10th Circuit Court of Appeals in Denver. Williamson v. Westby (In re Westby), BAP No. KS 12-027 (10th Cir. BAP, Feb. 4, 2013). The trustee claims the new Kansas statute protecting the EITC is unconstitutional because it applies only in bankruptcy and not to debtors outside of bankruptcy. She seeks turnover of the money to pay trustee fees and creditors claims.

U.S. Supreme Court Rejects Similar Theory

An important legal development occurred this week that affects the Westby case.  The Supreme Court of the United States declined to hear an appeal of a lower court ruling that Michigan’s bankruptcy specific exemption is constitutional. Richardson v. Schafer (In re Shafer), 689 F.3d 601 (6th Cir. 2012), petition for cert. denied (U.S. Feb. 19, 2013) (No. 12-643).

The Michigan homestead allowance for bankruptcy debtors ($30,000 or $45,000 if over 65 or disabled) is substantially higher than the Michigan general homestead exemption ($3,500). Compare Mich. Comp. Laws § 600.5451(1)(n) with Mich. Comp. Laws § 600.6023(1)(h) (West 2012). The Sixth Circuit Court of Appeals rejected the argument that having different exemptions in bankruptcy that outside of bankruptcy is unconstitutional. It said Michigan’s higher homestead exemption for debtors in bankruptcy “actually furthers, rather than frustrates, [the] national bankruptcy policy” of providing debtors with a fresh start.

The Kansas bankruptcy trustee is making the same argument that Richardson made against Schafer and lost. A West Virginia trustee lost a similar argument against Peveich in bankruptcy court and appeals in Sheehan v. Peveich, 574 F.3d 248 (4th Cir. 2009). Debtors Westby will urge the 10th Circuit to adopt the precedent of the 4th and 6th Circuits so they may keep their much-needed earned income tax credit. It will probably be months before a decision is announced. We’ll keep you posted.

Kansas EIC Bankruptcy Exemption Constitutional

A second  judge ruled Thursday that the new Kansas statute exempting one year of earned income tax credit from creditors  in bankruptcy proceedings  passes constitutional muster.

Hon.Robert Nugent, Chief Judge of the U.S. Bankruptcy Court for the District of Kansas, joined the previous ruling of his colleague, Hon. Janice Miller Karlin, in finding K.S.A. 60-2315 constitutional.  Chapter 7 bankruptcy trustees in  Topeka and Wichita have filed hundreds of objections to the use of the EITC exemption by debtors in bankruptcy. An appeal of the earlier ruling in the Topeka Division is pending before the Bankruptcy Appellate Panel for the  10th Circuit of the U.S. Court of Appeals in Denver.

Tax refunds and earned income tax credits have been collected from debtors to pay commissions to chapter 7 bankruptcy trustees and then pay a small dividend to creditors.  Under the new Kansas law, trustees will not be allowed to take the earned income tax credit portion of the tax refunds for the year of the bankruptcy case filing.  The law reduces substantially funds available for chapter 7 bankruptcy estates.

The exemption statute adopted by the 2011 Kansas Legislature “insures that a bankrupt Kansan’s earned income credit goes to pay the rent or buy her family food, not a prepetition creditor’s claim. All of this is consistent with the federal law and does not infringe upon the Constitution’s Supremacy Clause,” Judge Nugent wrote.

Both judges dismissed all the challenges to the exemption statute by the bankruptcy trustees and ordered the earned income tax credit refunds released to debtors. That is good news for hundreds of low income, working families in Kansas who desperately need the money to pay for their necessary living expenses.

Read Judge Nugent’s decision, In Re Lea, Case No. 11-11131. Read Judge Karlin’s decision, In Re Westby, Case No. 11-40986.

K.S.A. 60-2315  An individual debtor under the federal bankruptcy reform act of 1978 (11 U.S.C. § 101 et seq.), may exempt the debtor’s right to receive tax credits allowed pursuant to section 32 of the federal internal revenue code of 1986, as amended, and K.S.A. 2011 Supp. 79-32,205, and amendments thereto. An exemption pursuant to this section shall not exceed the maximum credit allowed to the debtor under section 32 of the federal internal revenue code of 1986, as amended, for one tax year. Nothing in this section shall be construed to limit the right of offset, attachment or other process with respect to the earned income tax credit for the payment of child support or spousal maintenance. History: L. 2011, ch. 25, § 1; Apr. 14.

Four chapter 7 bankruptcy trustees mounted an all-out attack on the newly enacted Kansas statute exempting the EITC  from creditors for debtors in bankruptcy, but failed to convince either  judge that the Kansas Legislature can’t make a law saying a citizen may keep earned income tax credits for one year away from her bankruptcy trustee and creditors. Jill Michaux filed a friend of the court brief in the Westby case for the National Association of Consumer Bankruptcy Attorneys (NACBA) and is c0-c0unsel with debtor attorney Bruce Barry of Manhattan in representing the Westbys in the appeal. The Kansas Attorney General, represented by Assistant Attorney General Derenda Mitchell, intervened in the cases to support the new law.

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Reaffirmation Requires More than Checking a Box

Much has been written on this blog about reaffirmation. BLN author Jed Berliner makes a compelling argument that reaffirmation in Chapter 7 is a bad idea – why should you assume personal liability for a debt and forgo up to 8 years of bankruptcy protection on the hope that time Full Article…
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Earned Income Tax Credits Now Exempt in Kansas Bankruptcy

Debtors will get to keep one year of earned income tax credits when filing bankruptcy in Kansas. A new law went into effect April 14, 2011, granting the exemption.  This change in the law will prevent bankruptcy trustees from taking the portion of income tax refunds that is EITC, a valuable benefit for low to moderate income, working people, most of whom have minor children at home.


AN ACT concerning civil procedure; relating to bankruptcy;

exempt property; earned income tax credit.

Be it enacted by the Legislature of the State of Kansas:

Section 1. An individual debtor under the federal bankruptcy

reform act of 1978 (11 U.S.C. §101 et seq.), may exempt the debtor’s

right to receive tax credits allowed pursuant to section 32 of the

federal internal revenue code of 1986, as amended, and K.S.A. 2010

Supp. 79-32,205, and amendments thereto. An exemption pursuant

to this section shall not exceed the maximum credit allowed to the

debtor under section 32 of the federal internal revenue code of

1986, as amended, for one tax year. Nothing in this section shall be

construed to limit the right of offset, attachment or other process

with respect to the earned income tax credit for the payment of

child support or spousal maintenance.

Sec. 2. This act shall take effect and be in force from and after

its publication in the Kansas register.

(Published in the Kansas Register April 14, 2011.)

Prior to the enactment of Senate Bill 12, bankruptcy trustees took earned income tax credits and tax refunds for their fees and for creditors’ claims.  Tax refunds are the most commonly seized assets in Kansas consumer bankruptcy cases.  The amount forfeited by individual debtors was substantial, but the amount distributed to creditors is relatively low, often 1 or 2% of their claims.

The law limits the bankruptcy exemption to the right to receive one year of earned income tax credits and does not prevent government offset of the credits for child support collection.  Bankruptcy trustees will still be able to take tax refunds not attributable to earned income tax creditors from debtors.

The Earned Income Tax Credit or the EITC is a refundable federal and Kansas income tax credit for low to moderate income working individuals and families. According to the Internal Revenue Service, Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they do not have a filing requirement.

Our thanks goes to Kansas Senator John Vratil, R-Leawood, for sponsoring SB12.  The bill passed unanimously in the Senate and nearly so (118 to 5) in the House of Representatives.  Testifying in favor of the bill were Marilyn M. Harp, executive director of Kansas Legal Services, and attorneys John Hooge of Lawrence, Paul Post of Topeka and Kansas Bankruptcy Information blogger Jill Michaux of Topeka.


Bankruptcy Code Gets Cost of Living Raise

Certain dollar amounts in the bankruptcy code are adjusted every three years for changes in the cost of living.  The next change will be April 1, 2010.  2010 Federal COLA adjustments

Tax Refunds to Attorney Fees then Bankruptcy Trustee

In re: Sydmark, Case No. 06-41218
In re: Black-Watkins, Case No. 05-42439
June, 2008, Judge Karlin

Lamie v. US and Redmond v. Lentz, Hodes and Wagers redux. Assignment of a tax refund does not divest the estate of an interest in them, even though UCC1 was filed. In a Chapter 7 case, refunds, after subtraction of a flat fee, must be turned over to Trustee.

What is Bankruptcy Lien Avoidance?

Avoidance: The Bankruptcy Code permits the debtor to eliminate (avoid) some kinds of liens that interfere with (or impair) an exemption claimed in the bankruptcy. Most judgment liens that have attached to the debtor’s home can be avoided if the total of the liens (mortgages, judgment liens and statutory liens) is greater than the value of the property in which the exemption is claimed. This is sometimes called “lien stripping.” For more, see Lien Avoidance and Lien Stripping.

What are Assets in Bankruptcy?

Assets.  Assets are every form of property that the debtor owns. They include such intangible things as business goodwill; the right to sue someone; or stock options. The debtor must disclose all of his assets in the bankruptcy schedules; exemptions remove the exempt assets from property of the estate.

Will I Lose My House If I File Bankruptcy?

I am frequently asked by people who are thinking of filing bankruptcy, “Will I lose my house if I file bankruptcy?” The fear of losing everything in bankruptcy is very real.

Fortunately, in Kansas the protection our law has for your home is in our state constitution and statutes. That is quite different from other states, Missouri, for example.

If you are entitled to claim the Kansas homestead exemption, it is unlikely you will lose your home for filing bankruptcy. Most of my clients who lose their homes, do so because they can’t afford to pay the mortgage payments and real estate taxes. Bankruptcy is not what causes people to lose their homes in Kansas usually.

There are some situations, which are rare, fortunately, when the bankruptcy trustee might be able to attack your homestead–the reasons are too complicated for a general information blog. Discuss the history of your home ownership with your attorney to put your mind at ease. Your attorney can analyze your circumstances and advise you of your rights so you can quit worrying.

Can They Take My Home Away from Me if I File Bankruptcy in Kansas?

Kansans in financial distress often ask, “Will I will lose my home if I file bankruptcy?“  The simple answer is that most Kansans do not lose their home if they file for bankruptcy.  We are lucky in Kansas to have a homestead law that protects one acre of land in the city and 160 acres of land in the country from forced sale. There is no limit on the dollar value of the homestead.

The longer answer to the question, though, is that some Kansans filing for bankruptcy relief will lose their homesteads to mortgage foreclosure, but probably not to the bankruptcy. Occasionally, bankruptcy filers lose their homes in bankruptcy because their home does not qualify for Kansas homestead protection or other exception to the general rule.

Kansas homesteads are not exempt for debts [Read more…]

Bankruptcy Stops Garnishment

Yes, both wage and bank account garnishments can be stopped by filing bankruptcy.  Garnishments after the bankruptcy is filed violate the automatic stay.

Ideally, you will file bankruptcy before the garnishment order is served on your employer or bank so none of your money is seized.  But, if a garnishment order is already in place, seizure of post-bankruptcy wages and account funds is stopped.  You won’t get the money back that has already been seized, but future seizures are banned.

In Kansas, wage garnishments are continuing [Read more…]

Topeka Chapter 13 Trustee Inducted into American College of Bankruptcy

Jan Hamilton Trustee

Jan Hamilton Trustee

Jan Michael Hamilton, standing chapter 13 bankruptcy trustee for cases filed in Topeka, was inducted into the American College of Bankruptcy Friday.   Hamilton was in the private practice of law from 1973 through 1999 when he was named to the trustee post.

Hamilton traveled to Washington, D.C., for the ceremony at the U.S. Supreme Court building.  Thirty three attorneys and judges were in the 20th class inducted into the college.

The American College of Bankruptcy is an honorary association [Read more…]

Will I Lose My Retirement Fund if I File Bankruptcy?

Question:  Is my retirement account I have worked hard for all my life down the drain if I file bankruptcy?  Generally, retirement accounts are protected in bankruptcy and you get to keep them in Kansas.

KPERS, Kansas deferred compensation plan, Social Security, federal civil service, 401(k) plans, IRAs, Roth IRAs, 403(b) plans are types of retirement plans that are exempt from the reach of creditors and bankruptcy trustees.

As with all things bankruptcy, the answer to this question actually depends on the facts of your specific circumstances.  [Read more…]

Kansas Median Income Goes Up on Bankruptcy Means Test

The Kansas median income has increased giving debtors a raise on the bankruptcy means test for cases filed on or after March 15, 2009.  The new figures by family size are:

  • one earner    $41,004
  • two people    $56,146
  • three people $63,245
  • four people   $74,626

* Add $6,900 for each individual in excess of 4.

Do I Have Other Options for Secured Debts Other than Reaffirmation?

You may be able to keep the collateral on a secured debt by paying the creditor in a lump sum the amount the item is worth rather than what you owe on the loan.  This is your right under the bankruptcy law to “redeem” the collateral.

Redeeming collateral can save you hundreds of dollars.  Because furniture, appliances, and other household goods go down in value quickly once they are used, you may redeem them for less than their original cost or what you owe on the account.

You may have another option if the creditor did not loan you the money to buy the collateral, like when a creditor takes a lien on household goods you already have.  You may be able to ask the court to “avoid” this kind of lien. This will make the debt unsecured.

Source: Your Legal Rights During and After Bankruptcy:  Making the Most of Your Bankruptcy Discharge Pamphlet, National Consumer Law Center, Boston, MA, www.nclc.org.

Do I Still Owe Secured Debts (Mortgages, Car Loans) After Bankruptcy?

Yes and No.  The term “secured debt” applies when you give the lender a mortgage, deed of trust, or lien on property as collateral for a loan.  The most common types of secured debts are home mortgages and car loans.  The treatment of secured debts after bankruptcy can be confusing.

Bankruptcy cancels your personal legal obligation to pay a debt, even a secured debt.  This means the secured creditor can’t sue you after a bankruptcy to collect the money you owe.

But, and this is a big “but,” the creditor can still take back their collateral if you don’t pay the debt.  For example, if you are behind on a car loan or home mortgage, [Read more…]

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