UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JAMES A. NEWSOME
ELIZABETH A. NEWSOME
DEBTORS CASE NO. 91-70576
This matter is before the Court on the debtors' Motion for Retention of Earned Income Tax Credit Portion of Tax Refund. The trustee has filed a Response to the Motion. The matter was heard on April 14, 1992, and submitted for decision at that time.
The debtors contend that they are entitled to the earned income credit portion of their tax refund, in the amount of $1106.00, because it is a benefit available to them on account of their low family income. They state that while it is distributed through the tax refund process, and a tax refund is a repayment of the excess over and above the taxpayer's liability, the earned income credit is not a tax refund and eligibility for it is not contingent upon payment of any federal income tax.
The issue as framed by the debtors' motion is whether the earned income credit is property of the bankruptcy estate. The debtors cite In re Searles, 445 F.Supp. 749 (D.Conn. 1978), in support of their position. The Searles court held that an earned income credit was not property of the estate within the meaning of'70(a)(5) of the Bankruptcy Act.
The Searles decision was based on the fact that one of the primary purposes of the Bankruptcy Act was to afford the debtor a fresh start:
In view of the dual purposes of the Bankruptcy Act to pay creditors and to afford the bankrupt a fresh start (cite omitted), an asset in the hands of the bankrupt can be taken by the Trustee to pay creditors under
s 70(a)(5) if 'it is sufficiently rooted in the pre-bankruptcy past and (not sufficiently) entangled with the bankrupt's ability to make an unencumbered fresh start...' (cite omitted).
At page 751. Another case holding that an earned income credit is not property of the estate is In re Hurles, 31 B.R. 179 (Bkrtcy.S.D.Ohio 1983).
However, in Matter of Davis, 136 B.R. 203, 207 (Bkrtcy.S.D.Iowa 1991), the court held that an earned income credit was property of the bankruptcy estate. It based its decision on the fact the 11 U.S.C.'541(a)(1) makes all property of the debtor, even that needed for a fresh start, property of the bankruptcy estate. As stated in the Legislative History of '541:
Paragraph (1) has the effect of overruling Lockwood v. Exchange Bank, 190 U.S. 294 (1903), because it includes as property of the estate all property of the debtor, even that needed for a fresh start. After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C.
The Davis court went on to determine that the earned income credit was exempt under Iowa law.
This Court agrees that the earned income credit is included in the bankruptcy estate pursuant to'541(a). However, there are exemption statutes to which the debtors may turn and thus remove such property from the estate. It has been held that exemption statutes are to be construed liberally. See Matter of Smith, 640 F.2d 888, 891 (7th Cir. 1981). This Court has held in In re Jerry Lynn Goldsberry, Sr. and Louise Marie Goldsberry, Debtors, Case No. 91-60875, May 22, 1992, that debtors may exempt their earned income credit pursuant to KRS 205.220(3) which exempts public assistance benefits. This Court will therefore enter an order allowing the debtors 30 days in which to move to amend to claim such an exemption.
BY THE COURT
Stephen A. Sanders, Esq.
Bruce A. Levy, Esq., Trustee