Chapter 7 bankruptcy Trustees are paid two ways. They receive a pittance of $60 to administer a “no asset” case. If they recover non-exempt assets then they are paid on a sliding scale based on how much they actually distribute to unsecured creditors.
When filings are down that means the fees available to chapter 7 trustees are way down as well. They need to do something to kick up the revenue. That something takes the form of chasing more assets from ordinary debtors. The fattest and juiciest target is the earned income credit (EIC) and additional child tax credit (CTC). Ohio exempted these funds from claims of creditors. That would to be the end of the story…but not in bankruptcy court.
These funds are paid out as part of a tax refund, usually by direct deposit, into a checking account. They are commingled (mixed) with other tax over-payments, and then with other funds that might already be in the account.
In 2013 I had three trustees make a play for clients’ Earned Income Credit and additional child tax credit funds on deposit. In each case the trustee claimed they lose their exempt status if they were commingled with other funds. In my most recent case where this happened, if successful it would have given that trustee a nearly $1500 bonus in addition to the standard $60.
In most cases the trustee wins these arguments because the debtor has a cheap, inexperienced attorney who does not respond. In bankruptcy court, if you do nothing in the face of a motion, then after the answer deadline the motion is granted. Trustees routinely win these issues by inaction.
There is controlling law in Ohio which provides for the protection of exempt funds even after they are deposited in a bank account. The jumping off point in this a case decided by the Ohio Supreme Court. The issue here was whether personal earnings retain their exempt status under RC 2329.66(A)(13). The court decided this issue in favor of protection the asset, holding that personal earnings when deposited into a bank account retain their exempt status so long as the source of the funds can be reasonably determined. The court did not go into the issue of separating out the funds because the parties agreed all funds on deposit were personal earnings. The interesting thing is the reasoning appears to apply to any exempt asset deposited to a bank account.
The sixth circuit court of appeals dealt with the issue of how to separate exempt and non-exempt funds on deposit in a bank account. This court adopted the “Lowest Intermediate Balance Test” (LIBT). In a nutshell this case says that if an account contains exempt money and non-exempt money is added. The non-exempt money is what is spent first from the account. What remains are the exempt funds.
These two cases just lingered since 1984 and 1986. In 2011, a bankruptcy judge for the Southern District of Ohio in Columbus put them together and applied the LIBT to protect Earned Income Credit and Additional Child Tax Credit money commingled in a bank account.
Using these cases, my scorecard to stop the chapter 7 trustees from grabbing exempt tax refund money is:
- Emailed citations to trustee. He agreed with cases and filed a no asset report.
- Trustee filed motion to turn over funds. I objected on behalf of my client. After discussion trustee settled issue reducing non-exempt fund claim.
- Trustee objection to claim of exemption and filed motion to turn over funds in excess of cash on hand and wildcard exemptions. I filed both an objection and a reply. Trustee withdrew both filings, issued no asset report and client retains over $4,200 of exempt funds.
If you receive tax return money from earned income credit or additional child tax credit and you need to file bankruptcy, you need an attorney who knows the law and will stand for you in court to protect the money that is intended for you and your children.