The intersection of taxes and bankruptcy present interesting issues. A recent bankruptcy case demonstrated this by considering whether Earned Income Tax Credit refunds (and their New Mexico state equivalents) can be exempt from creditors in a bankruptcy proceeding. The case shows how the answer can depend on where you live! In this case, under New Mexico law, the bankruptcy court held that these refunds were not generally exempt from creditors.
In the case, the debtor was entitled to tax refunds, which were in part attributable to the Earned Income Tax Credit (EITC) and a New Mexico version, the Working Families Tax Credit. As the court explained, these credits are “intended to provide economic relief to low-income heads of household who work.”
The debtor listed the tax refunds under the state’s “wildcard” exemption, which allows a debtor to choose what property to exempt; however, the wildcard exemption here had a limit of $500. The bankruptcy trustee eventually objected to the claimed exemptions to the extent they exceeded the $500 limit.
This post will consider two of the arguments made in response to the trustee’s objection. First, that the EITC tax refunds were not part of