In Alabama, the answer is YES. If you are receiving a tax refund that includes an earned income tax credit (EITC), then that portion of your refund is protected pursuant to Alabama Code § 38-4-8 (1975). In 2005, the Eleventh Circuit of the United States Court of Appeals answered this question directly in the case of In re James, 406 F.3d 1340 (11th Cir 2005), by finding that Alabama Code § 38-4-8 protects earned income tax credits.
Alabama Code § 38-4-8 states:
“All amounts paid or payable as public assistance to needy person shall be exempt …from levy, garnishment, attachment or any other process whatsoever and … in the case of bankruptcy, shall not pass to the trustee or other person acting on behalf of the creditors of the recipient of public assistance.”
In the James case, the chapter 7 trustee in the Middle District of Alabama challenged whether the earned income tax credit was public assistance as defined within this section. The Eleventh Circuit outlined that EITC was a form of public assistance because it was enacted to help low-income families and qualified “as government aid to needy persons”.
Whether the EITC of a tax refund is protected when one is filing chapter 7 is relevant this time of year, during tax season. If you have not received your tax refund prior to filing chapter 7, the refund would be an asset of your estate and would need to be listed on schedule B of your bankruptcy petition. Your bankruptcy attorney would help you know how much of your refund is exempt (protect) from the bankruptcy trustee. Most of the refunds we see are due, in part, from individuals receiving EITC. Since EITC is protected in Alabama, your bankruptcy attorney should list that exemption on schedule C of your petition to enable you to keep that amount protected.
If you are located outside of Alabama, please contact an attorney in your state to see if your EITC is protected. If you are interested in filing chapter 13 and do not qualify for EITC, click here to find out whether your tax refund would be protected.
Mary Pool is a shareholder of the Bond & Botes Law Offices in Montgomery and Opelika, Alabama. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Faulkner University’s Jones School of Law. She has represented thousands of clients over her more than 11 years working in the bankruptcy field. Read her full bio here.