The 8th Circuit Court of Appeals has ruled that the Additional Child Tax Credit is a protected asset in bankruptcy cases filed in Missouri.  In re Hardy, case number 14-1181 (2015).   Are such tax credits exempt in Nebraska bankruptcy cases?

Missouri law protects a person’s right to receive a “Social Security benefit, unemployment compensation or a public assistance benefit”  Mo. Rev. Stat. §513.430.1(10(a).  The term “public assistance benefit” is not defined under Missouri law, so the court reviewed the history of the Additional Child Tax Credit, especially the legislative history of recent amendments favoring lower income taxpayers.

In reversing the lower courts, the 8th Circuit found that the Additional Child Tax Credit was indeed a “public assistance benefit” even though some of the credits went to higher income families.

Whether Nebraska’s public assistance exemption applies to the Additional Child Tax Credit is less clear. Nebraska’s public assistance exemption law states the following:

 “No person shall have any vested right to any claim against the county or state for assistance of any kind by virtue of being or having been a recipient of assistance to the aged, blind or disabled, aid to dependent children, or medical assistance for the aged. No such assistance shall be alienable by assignment or transfer, or be subject to attachment, garnishment or any other legal process.”  Neb. Rev. Stat. §68-1013.

Is Nebraska’s protection of “aid to dependent children” the legal equivalent of Missouri’s protection of a “public assistance benefit?”  Does the Nebraska exemption only protect financial aid paid directly by state welfare offices or does it more broadly cover benefits received through a tax credits intended to benefit the elderly, disabled and minor children?

The Missouri public assistance benefit statute is located in the middle of a list of various property exempted in bankruptcy cases, whereas the Nebraska aid to dependent children law is contained in a chapter of laws describing public benefits paid by the state to its poorer citizens.  Does this distinction make a difference?  Just as Missouri’s public assistance benefit is a somewhat vague and undefined term, the Nebraska protection of aid to dependent children is equally vague and undefined.

Nebraska also protects aid to poor families in another statute:

§ 68-148. General assistance; not alienable; exception: 

No general assistance shall be alienable by assignment or transfer, or be subject to attachment, garnishment, or any other legal process, except that a county may pay general assistance directly to any person, corporation, or other legal entity providing goods or services, as described in section 68-133, to the poor person.

This time the Nebraska law speaks to a “general assistance” and not just aid to dependent children.  Did the Missouri and Nebraska legislatures anticipate their exemption laws being extended to protect Additional Child Tax Credits delivered through federal income tax refunds?  Probably not.  But what is clear that both states intended to protect government benefits specifically designed to alleviate the financial burdens of lower income families.

At this time it is unknown how the Nebraska bankruptcy court would rule on this issue.  It seems like the better argument is that such tax credits are protected, but debtors are better counseled to file their bankruptcy case after their tax refunds are received until a Nebraska ruling is issued.

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