Debtors Keep EICT, Bankruptcy Only Exemption Constitutional Kansas J...

The new Kansas law allowing bankruptcy debtors to keep one year of earned income tax credits from their creditors has survived its first constitutional challenge. By definition, debtors who receive earned income tax credits are low-income workers, typically single parents with small children.

In a 51-page decision, Judge Janice Miller Karlin of the U.S. Bankruptcy Court for the District of Kansas overruled the chapter 7 bankruptcy trustee’s attack on the exemption law (K.S.A. 60-2315) available to low-income taxpayers only in bankruptcy proceedings, but not generally in debt collection cases. In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012).

The trustee, Darcy Williamson of Topeka, challenged the Kansas exemption law in cases since the law took effect April 14, 2011. She asserts that the state statute violates the Uniformity and Supremacy Clauses of the U.S. Constitution. An appeal by the bankruptcy trustee is anticipated.

Under previous law, the bankruptcy debtors’ income tax refunds and the earned income tax credits were turned over to the chapter 7 bankruptcy trustee who kept 25% commission, paid herself attorneys fees and expenses, and then paid what was left over to creditors. Generally, the distribution to creditors was a small fraction of what was owed, often a penny or two on the dollar.

The Kansas Attorney General intervened in the challenge to support the constitutionality of the statute.  The National Association of Consumer Bankruptcy Attorneys (NACBA) filed a friend of the court brief in support of the debtors. Fellow chapter 7 trustee Robert Baer filed an amicus brief in support of Williamson.

Uniformity Clause
Article I, 8, clause 1
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and
provide for the common defense and general welfare of the United States; but all duties, imposts and
excises shall be uniform throughout the United States;

“Because the Kansas exemption statute is a state, rather than a federal enactment on the subject of bankruptcy, this Court finds no Uniformity Clause violation,” Judge Karlin ruled.

Supremacy Clause
Article VI, clause 2
This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or
which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges
in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.

“In addition, because of the concurrent nature of state/federal authority in bankruptcy, and because the Trustee has shown no express conflict between the exemption statute and the Bankruptcy Code, nor an implied conflict between the given exemption and the language and goals of the Bankruptcy Code, the Court finds no Supremacy Clause violation.” Judge Karlin concluded.

Earned income tax credits were enacted during the Ford administration and reenacted by Ronald Reagan who hailed the EICT program as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”