Hardy v. Fink – Battling a Bankruptcy Trustee for Exemptions
While filing for bankruptcy in Los Angeles can provide immeasurable relief for debtors of many varying situations‚ one must understand that there can in some cases be a somewhat adversarial relationship with the court-appointed bankruptcy trustee.
The person in this role will be responsible for reviewing the bankruptcy documents and petitions‚ examining the filer of the bankruptcy under oath‚ liquidating non-exempt assets and requesting the avoidance of certain transfers or security interests.
Perhaps one of the biggest points of contention between bankruptcy filers and trustees is the question of what is exempt. There is property you want to keep – and to which you may be entitled to keep. Some of this is very clear-cut under California law (i.e.‚ your home‚ your car‚ household items‚ wages‚ etc.). However‚ the trustee may have a different view on what is exempt and what isn’t. He or she will not make the ultimate decision‚ but their recommendations are taken very seriously by the court.
Filers need to carefully choose their battles on this front‚ but also need an advocate who can make a strong case to the court when a disagreement arises.
The case of Hardy v. Fink‚ reviewed recently by the U.S. Bankruptcy Appellate Panel for the Eighth Circuit‚ involved such an issue.
Here‚ the debtor‚ Hardy‚ had filed for relief of her debts under Chapter 13 of the bankruptcy code. (As opposed to a Chapter 7 liquidation‚ a Chapter 13 filing is a reorganization of debts‚ with a structured payment plan for between three to five years.)
In listing her qualified exemptions‚ Hardy claimed a public assistance benefit‚ as allowable under state law. This might not have been an issue had it been Social Security Disability or food stamp assistance or unemployment. However‚ Hardy claimed that the portion of her tax refund from the federal government for a child tax credit was a public assistance benefit.
The trustee objected to this particular exemption.
The bankruptcy court issued an opinion sustaining the trustee’s objection‚ finding that the tax credit was only available to those whose income placed them out of range for most public assistance benefits in the first place. That meant that the child tax credit in and of itself was not considered a form of public assistance.
The court noted that the bankruptcy code allows for the creation of a bankruptcy estate to include a debtor’s interest in future payments – and tax refunds are included. Per 26 U.S.C. 24‚ the bankruptcy estate specifically includes the refundable portion of the child tax credit.
Per the Internal Revenue Service‚ a child tax credit can be worth up to $1‚000 per minor child‚ depending on a person’s income. Married taxpayers filing jointly and earning $110‚000 annually wouldn’t qualify for this credit‚ and neither would a single person earning a yearly salary of $75‚000. But that’s not most of the population. Many parents are eligible for at least some portion of a child tax credit.
But should that money be protected in the course of a bankruptcy? The bankruptcy appellate panel for the Eighth Circuit decided no.
While the court found that state law (in this case‚ Missouri state law) doesn’t specifically define what a public assistance benefit is‚ the commonly understood meaning would not encompass this particular tax credit.
The bottom line is that the trustee is likely to call out bankruptcy filers who get a little too creative with exemptions. A well-prepared bankruptcy filing containing carefully-considered exemptions drafted by an experienced bankruptcy attorney should pass muster with the trustee.
If you are contemplating bankruptcy in San Fernando Valley‚ contact Nader‚ Naraghi & Woodcock‚ APLC to schedule your free consultation. Call (800) 568-0707.
Hardy v. Fink‚ Dec. 19‚ 2013‚ U.S. Bankruptcy Appellate Panel for the Eighth Circuit