Kansas Bankruptcy Court Protects Earned Income Tax Credit

April 25, 2012

A Kansas Bankruptrcy Court has upheld the constitutionality of a Kansas law protecting a Chapter 7 debtor’s Earned Income Tax Credit (EITC) during bankruptcy. This law was challenged by the bankruptcy trustee who argued that the Kansas legislature could not write a law that only applied to bankruptcy proceedings. Bankruptcy is a federal process and its laws are written by the U.S. Congress.

The Kansas law created a new bankruptcy exemption for Kansas debtors. It allows bankruptcy debtors to protect their EITC money, a tax credit designed to assist low- and moderate-income families. However, the this exemption only protects EITC money during bankruptcy and does not apply outside of bankruptcy.

The Chapter 7 bankruptcy trustee challenged the constitutionality of the law by stating that it violates the Uniformity Clause. See In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012). There is currently a split of opinion in the federal courts whether state exemptions that only apply to bankruptcy proceedings are constitutional. The Kansas Bankruptcy Court in Westby found that Kansas’ EITC bankruptcy exemption did not violate the Uniformity Clause or any other constitutional provision. These cases could open the door for more debtor bankruptcy protections at the state level.

The full opinion can be found on the Kansas Bankruptcy Court website: http://www.ksb.uscourts.gov/images/ksb_opinions/JMK_11-40986-45.pdf

The federal bankruptcy process is a complex combination of federal and state laws. Navigating this process alone is like walking through a minefield while blindfolded. An experienced bankruptcy attorney can guide you through this complicated process, protect your rights and property, and get you a fresh financial start.

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