Earned Income Tax Credit is Income for Chapter 13 Cases

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By Daniel Gill

A low-income single mother’s earned income tax credit is considered income to be used in calculations by the woman in her Chapter 13 case, the Seventh Circuit ruled on direct appeal from the bankruptcy court.

But the debtor can offset reasonable projected expenses against that income, as well as her tax overwithholding refunds, wrote Judge Joel M. Flaum in his March 22 opinion.

Denise L. Blake filed Chapter 13 in July 2016. In Chapter 13, individuals receiving regular income can obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period. The plan is facilitated by a Chapter 13 trustee appointed by the court.

A Chapter 13 debtor is required to disclose her “current monthly income,” or CMI, and must pay all her “projected disposable income” into the plan for distribution to creditors. Projected disposable income is calculated by subtracting allowed monthly expenses from the CMI.

Over the Chapter 13 trustee’s objection, the bankruptcy court approved a plan that included her anticipated tax refunds, including the expected income tax credits, and allowed certain monthly prorated expenses. These included medical and dental expenses, shoes and clothing for her two sons, and new beds and furniture for them. The trustee objected to these expense deductions.

The Seventh Circuit authorized direct appeal because there is no controlling decision from that circuit or the U.S. Supreme Court as to whether tax credits are disposable income under the bankruptcy code.

The court held that the tax credit should be considered when calculating CMI, by dividing the payment by 12 months. Neither of the parties actually disputed this conclusion.

The court then decided that the debtor could offset her listed expenses. It agreed with the bankruptcy court that the claimed expenses were reasonable and that the debtor was living on a “pretty skinny budget.”

The court explained that because the debtor’s income placed her below the median in her geographical area, she wasn’t constricted to IRS standards for allowable expenses. Instead she need only show that the expenses were reasonably necessary. The court didn’t have a basis to disagree with the bankruptcy court’s conclusions that the expenses were reasonably necessary.

Circuit judge William J. Bauer concurred with the decision. Circuit judge Daniel A. Manion wrote a separate concurrence, agreeing in the conclusion but arguing that the court shouldn’t have granted direct appeal in this case.

Marilyn O. Marshall, the Chapter 13 trustee, was represented by Lauren L. Tobiason, Chicago. James A. Brady and Jamie F. Resiman, Chicago, represented Blake.

The case is Marshall v. Blake , 2018 BL 99412, 7th Cir., No. 17-2809, 3/22/18 .

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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