In Washington State, like other states that broadly exempt “public assistance,” the Ninth Circuit Bankruptcy Appellate Panel held that the Earned Income Tax Credit and the Additional Child Tax Credit are both exempt.
The debtor filed a chapter 7 petition at the year’s end and received a federal income tax refund, including a $1,700 refund for the ACTC and $5,550 for the EITC. The debtor claimed that both were exempt under Washington State law, but the trustee objected.
Bankruptcy Judge Brian D. Lynch of Tacoma, Wash., overruled the objection. The trustee appealed, but the BAP affirmed in a per curiam opinion on December 23.
Because the appeal involved interpretation of state statutes, the BAP’s review was de novo.
In its nonprecedential opinion, the BAP said that no state or federal court has ruled on whether the two refunds are exempt under Washington law. The BAP also found no help from legislative history. However, the Washington Supreme Court has said that state exemptions must be liberally construed in favor of the debtor.
The Washington statute, titled “Public Assistance,” provides that “assistance given” by the statute is not subject to execution, levy, attachment or garnishment. Although “assistance given” is not defined, the provision goes on to say that “public assistance” is “public aid to persons in need . . . for any cause, including . . . federal aid assistance” and specified benefits under state law.
In turn, “federal aid assistance” is defined to mean assistance under any existing or future federal law by which the federal government makes payments to the state for “any category of needy persons.”
Bankruptcy courts in other states with similar exemption statutes, the BAP said, have concluded “that both tax credits are exempt, . . . particularly when the law is liberally construed, as mandated by the Washington Supreme Court.”
First addressing the ACTC, the BAP cited Bankruptcy Judge Jim D. Pappas, who held that the refund was exempt under an Idaho statute that exempted “public assistance benefits.” Judge Pappas noted how Congress had amended the ACTC to say that it was designed to benefit low-income families. In re Farnsworth, 558 B.R. 375, 380 (Bankr. D. Idaho 2016).
The BAP cited bankruptcy courts from Missouri, Iowa and Illinois that have reached the same conclusion. Courts that found no exemption in other states, the BAP said, “were interpreting an older version of the credit that was not explicitly aimed at benefiting lower income families.”
On the ACTC, the BAP affirmed the bankruptcy court, holding that the “ACTC is a federally administered needs-based program that qualifies for exemption” under the Washington statute.
Regarding the EITC, the BAP said that “courts in other states with similar, broadly-worded statutes have found the EITC to be exempt.” The EITC has been “generally regarded . . . as a form of needs-based public assistance.”
In states where the EITC was held nonexempt, the BAP said “it was because the language of the relevant statute so mandated.”
The BAP affirmed Bankruptcy Judge Lynch, holding that the EITC is a federally administered needs-based program.
In Washington State, like other states that broadly exempt “public assistance,” the Ninth Circuit Bankruptcy Appellate Panel held that the Earned Income Tax Credit and the Additional Child Tax Credit are both exempt.
The debtor filed a chapter 7 petition at the year’s end and received a federal income tax refund, including a $1,700 refund for the ACTC and $5,550 for the EITC. The debtor claimed that both were exempt under Washington State law, but the trustee objected.
Bankruptcy Judge Brian D. Lynch of Tacoma, Wash., overruled the objection. The trustee appealed, but the BAP affirmed in a per curiam opinion on December 23.
Because the appeal involved interpretation of state statutes, the BAP’s review was de novo.