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

ahern_larry_regular
February 27, 2022
Background A recent Chapter 7 case out of the Bankruptcy Court for the Southern District of California, In re Rhodes,1 addressed reaffirmation in a context that should be of interest to debtor's attorneys. As explained in Part 1, Rhodes points out that the "ride-through" of a debtor's secured debt after a Chapter 7 — which Congress . . . It...
Members
May 5, 2019
Millions of taxpayers filed a 2018 tax return in the last few weeks, making now a prime time for everyone to consider whether their tax situation came out as they expected. If it didn’t, they can use their recently finished 2018 return and the IRS Withholding Calculator to do a Paycheck Checkup and adjust their withholding. Checking and then adjusting...
October 20, 2019
(First published here on August 19, 2019. Used with permission.) By Daniel Cohn, Esq., Legal Department, Wells Fargo Bank, N.A. General Rule: No Primary Residence Mortgage Changes The general rule in bankruptcy is that debtors cannot cram down loans secured only by mortgages on their primary residences. But wait, “what’s a cram down?” you ask. For non-bankruptcy folks, a cram...
Members
February 2, 2020
By The Honorable William Houston Brown (Retired) Limitations period for actions under FDCPA. Construing the statute of limitations for actions against debt collectors under the Fair Debt Collection Practices Act (FDCPA), the Supreme Court held that “absent the application of an equitable doctrine, the statute of limitations in § 1692k(d) begins to run on the date on which the alleged...
Members
William-1_print_2019
On June 6, the Supreme Court’s unanimous opinion in Siegel v. Fitzgerald1 held that the increase in U.S. Trustee fees in Chapter 11 cases violated the uniformity requirement of the Constitution’s Bankruptcy Clause,2 because the fee increase in 2017 only applied to in the U.S. Trustee districts and didn’t apply to the Bankruptcy Administrator districts in Alabama and North Carolina....
September 29, 2019
By The Honorable Hannah Blumenstiel Yes, MORE on SBRA. We realize that to attorneys February of 2020 seems a LONG way away but it really isn’t. We are building our library on this important legislation so it is available when YOU are ready for it. In this week’s installation, Judge Blumenstiel, analyzes the legislation. The first two and a half...
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
ahern_larry_regular
March 26, 2023
Introduction Amendments to 16 rules and new one new rule took effect December 1, 2022. Many reflected changes necessitated by the Small Business Reorganization Act of 2019 (SBRA),1 and had been in place in the same or similar form on an interim basis since that legislation took effect. Part 1 of this series summarized 2022 . . . It looks...
Members
Academy Circle Logo Final
March 27, 2022
Krista M. Preuss was appointed as the Chapter 13 Standing Trustee for the Southern District of New York on February 1, 2018. She succeeded Jeffrey Sapir after his retirement. On October 1, 2021, she was appointed as the Chapter 13 Standing Trustee for the Eastern District of New York, succeeding Marianne DeRosa upon her retirement. Yep, two trusteeships. Can you...
March 28, 2021
By Henry E. Hildebrand, III, Chapter 13 Standing Trustee (Nashville, TN) Section 1328(i) requires the court to consider the discharge provisions of §§ 1328(a) through (h) and the fact that incomplete personal residence mortgage payments or a forbearance do not preclude but do not compel a COVID-19 Discharge. (Tighe) In re Ritter, 2021 WL 864092 (Bankr. C.D. Cal. March 5,...
Members