Public assistance exemption applied to tax refund of Chapter 7 debtor

On behalf of Richard Pearson

In the case of In re Dmitruk, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit held that the portion of the debtor's tax refund which was attributable to the Minnesota educational tax credit was exempt property in his Chapter 7 bankruptcy case as "government assistance based on need."

Background and procedural history

In 2013, the debtor filed a voluntary petition for bankruptcy under Chapter 7. When the petition was filed, the total household income for the debtor and his wife and three minor children consisted of $1,250 in monthly income earned by the debtor plus a $900 monthly food stamp allowance. The debtor claimed exemptions in several separate components of his federal and state income tax refunds. The debtor cited a Minnesota exemption statute, Section 550.37, subdivision 14, as the basis for the claim, asserting that certain portions of the debtor's tax refunds were exempted as "government assistance based on need."

The Chapter 7 Trustee filed an objection to the debtor's claimed exemptions. The Bankruptcy Court allowed some of the claimed exemptions, and denied some.

The Chapter 7 Trustee appealed the bankruptcy court's allowance of an exemption in the amount of $1,357, which was the portion of the debtor's 2013 state income tax refund that was derived from the Minnesota education tax credit.

The Bankruptcy Appellate Panel's decision

The Bankruptcy Appellate Panel upheld the bankruptcy court's decision. Subdivision 14 of Section 550.37 exempts from "all claims of creditors" government assistance based on need and also the salary or earnings of a recipient of government assistance based on need. The statute lists specific examples of the types of government assistance which are exempt, but the appellate panel noted that the list is not exclusive, and determined that the education credit portion of the debtor's tax refund fit within the statute's definition of "government assistance based on need."

The Appellate Panel concluded that the Minnesota K-12 Education Credit was similar to the federal earned income tax credit. It provided a direct payment or subsidy that was designed to assist low-income recipients in providing a quality education for their children. The credit was a "fully refundable" credit, rather than a refund of overpayment of taxes. Where the credit exceeds the total tax liability of the taxpayer, the excess amount of the credit is still paid to the taxpayer in the form of a "refund" check. The credit for education-related expenses was only available to individuals with relatively low income. The maximum credit of $1,000 per child applies where the taxpayer's income is below a specified amount. The credit is then completely phased out for taxpayers whose income reaches a maximum threshold amount.

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