When you file for bankruptcy in New York, any income tax refund that you have not yet received and are entitled to as of the date of the bankruptcy filing is consider property of the estate.
In New York, Debtor and Creditor Law § 283(2) allows you to claim a case exemption of up to $2,500 ($5,000 if you file for bankruptcy with your spouse). That statute specifically defines cash to include income tax refunds.
This means that tax refunds can be exempted to the extent that you have an unused cash exemption and have not claimed a homestead exemption.
But what if a portion (or all) of that income tax refund is attributable to an earned income tax credit?
New York Debtor and Creditor Law § 282(2)(a) allows for a further exemption in your interest in “a social security benefit, unemployment compensation or a local public assistance benefit.” Earned income tax credits, however, are not included within this list of designated benefits, according to the courts in New York.
Therefore, you cannot exempt the portion of your income tax refund that is attributable to the earned income tax credit. Your only exemption available is as part of your cash exemption.
If you have the right to receive an income tax refund at the time you file for bankruptcy in New York, and if you do not have enough left over from your cash exemption, you cannot exempt your earned income tax credit separately.
The case that established this holding regarding the earned income tax credit is In re Garrett, 225 BR 301 (Bkrtcy. W.D.N.Y. 1998).
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