Seizing Welfare from the Bankrupt

Abstract

The earned income tax credit (EITC) is currently the largest means-tested antipoverty program in the United States that assists low-income working families surviving along the edges of poverty. A central component of the national welfare system, the EITC has lifted millions of families with children out of poverty and has produced myriad benefits for their everyday lives. But most of the poor and near-poor endure in the low-wage labor market and often lead turbulent financial lives plagued by precarious employment along with deleterious material and psychological constraints in budgeting for daily expenses. For the segment of these families also burdened by unwieldy debts, bankruptcy laws offer a fresh financial start in life, in part by allowing debtors to exempt certain property from the reach of creditors. 

However, in most jurisdictions EITC refunds are not exemptible in bankruptcy and can be seized by trustees to both enrich themselves and to distribute to creditors, while many middle-class assets are shielded entirely. Adopting a critical theory framework, this Article maintains that capturing EITC refunds from low-income working families who resort to filing bankruptcy is inequitable and perpetuates class inequality. Low-income working families are doubly exploited in our harsh economy, first by the low-wage labor market and second by the bankruptcy system. I argue for the implementation of statutory changes to fully protect EITC refunds in bankruptcy as a matter of fundamental equity.

Keywords: Bankruptcy, Welfare, Earned Income Tax Credit

JEL Classification: K34, K35