The Eighth Circuit allows a child tax credit exemption in bankruptcy proceedings: a minty fresh start or abuse of the system?

• Author: Keller, Rebekah
• Position: NOTE

Hardy v. Fink (In re Hardy), 787 F.3d 1189 (8th Cir. 2015).

1. INTRODUCTION

   Between 2014 and 2015, bankruptcy filings across the country decreased over ten percent. (1) In the Eighth Circuit, bankruptcy filing rates have dropped from 57,746 in 2014 to 51,301 in 2015. (2) The decrease in filings in the Eighth Circuit is telling when compared to the filing statistics from 2008 and 2009 in the same circuit: in 2008, bankruptcy filings in the Eighth Circuit reached 73,677, and in 2009, filings reached 90,539. (3) During the height of the economic downturn in the United States, bankruptcy filings nationwide increased almost thirty-two percent from 2008 to 2009. (4) Even though filings rates are slowly decreasing across the nation, American citizens are still feeling the effects of the economic crisis that occurred between 2007 and 2009. While there are numerous reasons debtors file for bankruptcy, the market crash in 2008 and the subsequent economic downturn can be attributed to many individuals' financial problems.

   With money problems still pervasive in American society, and bankruptcy filing rates still so high, there are few ways in which debtors can recover from such drastic economic situations. Bankruptcy protection is one of the most common ways debtors facing insurmountable economic difficulties can pull themselves out of debt. The bankruptcy code is designed to give a fresh start to those in near financial ruin by ensuring they are unencumbered by past debt. One way to accomplish this fresh start is by a discharge of debts that are not paid in bankruptcy proceedings. (5) Another way to achieve this fresh start is through the exemption scheme.

   Exemption schemes vary from state to state, but they generally allow debtors to keep their assets to continue a socially acceptable standard of living. (6) This Note addresses a common source of relief that most debtors take advantage of when filing for bankruptcy: exemption statutes and its applicability to low-income debtors who qualify for "public assistance benefits" and income-based tax credits. One exemption that commonly appears in federal and state exemption schemes is the public assistance benefit. (7) While commonly included in exemption statutes, public assistance benefits are not often defined within these statutes; however, the most basic definition of a public assistance benefit is a form of financial aid for the "needy." (8) The scope of public assistance benefits has been a subject of scrutiny for years. (9) Currently, there is a hopeless split among bankruptcy courts across the country in determining whether the Child Tax Credit constitutes a public assistance benefit or not. The Eighth Circuit is the first appellate court to take up this issue.

   Part II of this Note examines the issues presented in the instant case, Hardy v. Fink, in which the Eighth Circuit became the first circuit court to include the Child Tax Credit as a "public assistance benefit" under the Missouri exemption statute in a bankruptcy proceeding. Part III explores the applicable laws, legislative history, and recent case law that addressed these issues. Part IV explores the Hardy decision's in-depth examination of the legislative history surrounding the Child Tax Credit and the underlying purpose behind including public assistance benefits in both state and federal exemption schemes. Part V offers a framework for analyzing exemption schemes across the country by examining the Missouri exemption scheme and attempting to provide clarity in the current statute for debtors and courts in the future.

2. FACTS AND HOLDING

   Pepper Minthia Hardy, sole provider for a family of four, (10) filed for Chapter 13 bankruptcy in October 2012. (11) As part of her filing, she was required to complete an array of forms, each setting out her assets, debts, and income. (12) On her Schedule B, (13) she indicated that she was expecting an income tax refund, part of which was to be from a Child Tax Credit ("CTC"). (14) Ms. Hardy estimated that her total income tax refund would be $4950. (15) In her bankruptcy filing, she indicated that $4895 of her expected $4950 return (16) was to be exempt from her bankruptcy estate. (17)

   The U.S. Bankruptcy Court for the Western District of Missouri established that Ms. Hardy's actual federal income tax refund was $6311. (18) Of this $6311 refund, $2000 was from a CTC (19) that Ms. Hardy listed as exempt from her Chapter 13 bankruptcy as a "public assistance benefit" under Missouri bankruptcy exemption laws. (20) The trustee handling Ms. Hardy's Chapter 13 bankruptcy objected to Ms. Hardy's claim that a portion of her federal income tax refund attributable to the CTC was exempt from the reach of her creditors. (21) The bankruptcy court consolidated Ms. Hardy's case with another Chapter 13 case raising the same issue. (22)

   In the accompanying case, Larry and Tara Lovelace filed for Chapter 13 bankruptcy in October 2012. (23) On their Schedule B, Mr. and Mrs. Lovelace indicated they would be receiving an income tax refund, part of which would be attributable to a CTC. (24) Mr. and Mrs. Lovelace claimed three dependent children on their federal and state income tax returns. (25) The bankruptcy court established that Mr. and Mrs. Lovelace were to receive a federal tax refund of $4391. (26) Of their $4391 federal refund, $3000 of it was attributable to the CTC. (27) Like Ms. Hardy, Mr. and Mrs. Lovelace listed the CTC as exempt from their Chapter 13 bankruptcy proceeding as a public assistance benefit. (28) The trustee for the Lovelaces' Chapter 13 bankruptcy objected to the exemption of the CTC from their bankruptcy estate. (29)

   In its memorandum opinion, the bankruptcy court sustained the trustees' objections in both the Hardy and Lovelace cases to the exemption of a CTC as a public assistance benefit. (30) The court held that, based on the legislative history of the CTC and Missouri's bankruptcy exemption laws, the CTC was not a valid public assistance benefit that could be exempted from bankruptcy estates. (31) The court then addressed multiple Missouri cases in which debtors have attempted to persuade the bankruptcy court that the CTC was a public assistance benefit. (32) None of the debtors in the cited cases were successful in doing so, and the court remained unconvinced in the cases at bar. (33)

   Ms. Hardy then appealed the bankruptcy court's decision to the U.S. Bankruptcy Appellate Panel for the Eighth Circuit. (34) The Bankruptcy Appellate Panel affirmed the bankruptcy court's order sustaining the trustee's objection to the debtor's claimed exemption. (35) The sole issue on appeal was Ms. Hardy's claimed exemption of the $2000 CTC from her 2012 federal tax return. (36) Ms. Hardy argued that the CTC fit within the common meaning of a public assistance benefit, which she argued was "quite plainly an assistance that benefits the public." (37) The court stated that the statute, legislative history, and dictionary did not support Ms. Hardy's proffered definition of a public assistance benefit. (38) The court instead relied on a Merriam-Webster's dictionary that defined a public assistance benefit as: "government aid to needy, aged, or disabled persons and to dependent children." (39) Under its definition of a public assistance benefit, the Bankruptcy Appellate Panel held that the CTC was not a public assistance benefit under Missouri law and, therefore, could not be exempted from her bankruptcy estate. (40)

   Ms. Hardy appealed the Bankruptcy Appellate Panel's decision to the U.S. Court of Appeals for the Eighth Circuit. (41) The court, though still not persuaded by Ms. Hardy's proffered definition of a public assistance benefit under Missouri law, ultimately ruled in Ms. Hardy's favor. (42) The court relied on the legislative intent and history of the amendments to the CTC instead of previous case law based on older versions of the CTC. (43) This decision made the Eighth Circuit the first circuit court to rule in a debtor's favor regarding the CTC exemption. (44) The Eighth Circuit reversed the lower court's order sustaining the trustee's objection to the debtor's exemptions. (45) The court held that the true legislative intent behind the CTC statute was to benefit low-income families, which fit within Missouri's public assistance benefit exemption statute, and the credit should be exempt from Ms. Hardy's bankruptcy estate. (46)

3. LEGAL BACKGROUND

   The legislative history of the United States Code is filled with attempts to provide aid, support, and tax assistance to low-income or impoverished citizens. These attempts are clearly established in the legislative history of both the federal bankruptcy laws and the federal tax laws. Because both the bankruptcy code and the tax code are integral to the decision in the instant case, it is important to establish a basic understanding of how each statute operates in this context and how the statutes affect individuals in Missouri. This Part establishes a framework of the bankruptcy laws relevant to debtors' exemption claims, paying particular attention to the differences between the federal bankruptcy code's exemption scheme and Missouri's exemption statutes. Next, it analyzes the CTC in the tax code, focusing on the legislature's intent in enacting the law and tracing how it has evolved over time. Finally, this Part discusses how lower courts have addressed the issue of whether the CTC is included within the definition of public assistance benefits.

   1. Bankruptcy and Exemption Statutes

      Title XI of the United States Code sets forth the federal bankruptcy statutes. (47) Title XI also designates the different types of bankruptcy filings available. (48) An individual debtor may file for bankruptcy under three different code chapters: Chapter 7, Chapter 11, and Chapter 13. (49) Debtors' first duties under each filing option are to report all income, personal property, and other assets in their bankruptcy petitions. (50)

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