Benn And The Tax Refund Exemption In Bankruptcy

(Reprinted with permission. Bankruptcy Law Network September 2011)

By Wendell Sherk, Missouri Bankruptcy Attorney

Sometimes a strategy causes more harm than good.  Many long-accepted Missouri bankruptcy exemptions have become uncertain or been lost due to one such case.  This is the story of how one strategy blew up to create dangerous uncertainty for consumers.

Bankruptcy exemptions dictate what stuff is protected from a bankruptcy trustee.  As allowed by federal law, Missouri has “opted out” and require debtors to use only its bankruptcy exemptions when they file.

In most places, the “opt out” is a simple law.  And Missouri’s “opt out” simply says a debtor can protect “any property that is exempt from attachment and execution under the law of the state of Missouri…”

This language seems simple and caused no trouble for over 25 years when it came to Missouri bankruptcy exemptions.  But some felt that “exempt from attachment and execution” meant any property that could not be attacked via the exact technical process of “attachment and execution.”

Specifically, income tax refunds not yet received because a creditor cannot “attach” a tax refund in Missouri — even though some creditors could get at them in other ways.

The reading, if it prevailed, would benefit consumers when determining their bankruptcy exemptions.  But the strategy would allow attorneys to file cases in Missouri without any concern about large tax refunds coming in soon.  That in turn would streamline bankruptcy practice and avoid a major exemption issue we all deal with each Winter and Spring.

It would also take a regular source of assets away, frustrating bankruptcy trustees and creditors alike.

Ultimately the question reached the federal Eighth Circuit Court of Appeals in In re Benn in 2007.  The circuit concluded that the bankruptcy exemptions could not be used to protect tax refunds under the “opt out” law, Sec. 513.427 RSMo.

In essence, the circuit reasoned that the words “from attachment and execution” should not be read separately from the word “exemption.”  Reading it as a whole, it implied that the “opt out” law requires a separate Missouri law that would protect the property.  Essentially, “exempt” was crucial while “attachment and execution” was not.

This was actually the prevailing wisdom concerning bankruptcy exemptions.  Unfortunately, the Benn court went on to reach additional conclusions — which seems to be dicta — that played havoc in consumer Missouri bankruptcy cases ever since.  It is not clear the implications of the additional Benn comments were intended, though.  For example, Benn says

[The opt out law] does not create an exemption for tax refunds, and no other Missouri statute or non-bankruptcy federal exemption statute permits a debtor to exempt tax refunds from the bankruptcy estate.

Missouri does provide “wildcards” (e.g. 513.430.1(3) RSMo.) which are bankruptcy exemptions for any property the consumer chooses and has always been allowed for refunds.  Yet a literal reading of this Benn dictum means the Missouri wildcards have been struck down (at least as used for refunds).

It’s clear Benn did not really intend to disallow exemption wildcards.  And no bankruptcy court has so ruled as yet.  But a strict obedience to every phrase in Benn would result in no exemption for any tax refund in the future.  And some courts have gone some way down this road in following other Benn dicta, as we will see in the next installment.


Wendell J. Sherk is an attorney in St. Louis, practicing primarily in consumer bankruptcy and debtor representation. He graduated from Washington University in 1986 and Washington University School of Law in 1989. He is a principal of the firm Sherk & Swope, LLC as well as a member of the National Association of Consumer Bankruptcy Attorneys, American Bankruptcy Institute, and The Missouri Bar. He contributes to the bankruptcylawnetwork.com blog and his e-mail is: [email protected].


No Author Biography has been linked to this Article.

Related Articles

Copy of Hildebrand-2016
December 3, 2023
Debtor’s counsel should not be compensated for work undertaken on behalf of a debtor in order to correct errors.
Members
February 16, 2020
By Lawrence R. Ahern, III, Brown & Ahern (Nashville, TN) Introduction This series has focused on the four bankruptcy-related bills that were enacted during the 116th Congress and signed into law on August 23, 2019. One bill, the Small Business Reorganization Act of 2019 (SBRA), will be effective February 19, 2020. It appears in its entirety in Appendix B to...
Members
ahern_larry_regular
December 19, 2021
Introduction Following Part 1's review of the December 1, 2021 changes in the Federal Rules of Bankruptcy Procedure, Part 2 and
Members
September 20, 2020
By The Honorable William Houston Brown (Retired) Chapter 13 debtors’ FDCPA claim was not “related to” bankruptcy case. After reopening closed case, the debtors filed adversary complaint against mortgage holders and servicers, alleging various claims for violation of discharge injunction, automatic stay and FDCPA. The complaint plausibly pleaded elements required for §§ 362(k) and 524(i), but the claims under FDCPA...
Members
December 20, 2020
By Robert S. Thomas, II,1 Chapter 13 Standing Trustee for the District of Maryland (Baltimore) All stakeholders strive to make the Chapter 13 program efficient and beneficial to all parties. The Chapter 13 program has evolved over the years to better serve debtors and creditors. This is due in part because of the remarkable actions taken daily by our Bankruptcy...
cohen3
October 29, 2023
“FFEL and Perkins loans are different than other federally backed student loans as these are owned by private lenders, but guaranteed by the government.”
August 11, 2019
By Henry E. Hildebrand, III, Chapter 13 Standing Trustee (Nashville, TN) Exemptions in consumer cases have always presented difficult problems for practitioners and trustees. In a bow to states’ rights, the Bankruptcy Act of 1898 deferred to exemptions created by state law. When BAPCPA was enacted in 2005, Congress continued the practice of allowing each state to “opt out” of...
Members
January 20, 2019
By Lawrence R. Ahern III, Brown & Ahern (Nashville, TN) PART I: Statutes, Rules & Supreme Court (In)actions Introduction Click here for Part II Click here for Part III Click here for Part IV What is the effect of an arbitration clause in bankruptcy? When . . . It looks like you are not signed in or registered! This content...
Members
September 22, 2019
By The Honorable William Houston Brown (Retired) Chapter 7 trustee’s avoidance of post-petition mortgage lien. After filing Chapter 7, the debtor, without prior authority, refinanced property of the estate twice and the trustee sought avoidance of the mortgage lien under § 549. No defense was available because the mortgagee did not qualify as a good faith transferee, having knowledge of...
Members
Copy of Hildebrand-2016
August 27, 2023
A creditor having received relief from the automatic stay prior to confirmation of the debtor’s plan is nonetheless bound by the terms of the plan, once confirmed.
Members

Looking to Become a Member?

ConsiderChapter13.org offers a forum to advance continuing education of consumer bankruptcy via access to insightful articles, informative webinars, and the latest industry news. Join now to benefit from expert resources and stay informed.

Webinars

These informative sessions are led by industry experts and cover a range of consumer bankruptcy topics.

Member Articles

Written by industry experts, these articles provide in-depth analysis and practical guidance on consumer bankruptcy topics.

Industry News

The Academy is the go-to source for the latest news and analysis in the Chapter 13 bankruptcy industry.

To get started, please let us know which of these best fits your current position: