Earned Income Credit (EIC) and Bankruptcy

Whether you can keep your EIC in bankruptcy depends on your state's exemption laws.

By , J.D. · California Western School of Law

In a bankruptcy case, your anticipated tax refund is considered an asset. This means that if you can't exempt your tax refund, a Chapter 7 bankruptcy trustee can take it and give it to your creditors. If you qualify for earned income credit (EIC), you may be entitled to a large refund. But whether the trustee can go after your EIC depends on the exemption laws of your state. Read on to learn more about how to protect your EIC in bankruptcy.

What Is Earned Income Credit?

EIC is a tax credit designed to provide a tax break to qualifying low income individuals and families. Because it is a tax credit, it reduces the amount of taxes you have to pay. If your EIC exceeds your tax liability, you get to keep the excess amount as a refund. This means more money in your pocket to help with expenses. Unfortunately, any nonexempt refunds you are entitled to receive can be at risk if you file for Chapter 7 bankruptcy (discussed below).

Earned Income Credit Is an Asset in Bankruptcy

When you file for bankruptcy, any anticipated tax refunds (including your EIC) become property of the bankruptcy estate even if you haven't received them yet. In Chapter 7 bankruptcy, the trustee can take the nonexempt portion of any refunds you are entitled to (as of your filing date) and distribute it to your creditors. Luckily, because the EIC is designed to help low income debtors, certain states have created bankruptcy exemptions that specifically protect EIC refunds.

How to Exempt Your Earned Income Credit

In Chapter 7 bankruptcy, if you can exempt an asset, the trustee can't sell it to pay your creditors. Each state (as well as the federal system) has its own set of bankruptcy exemptions. Currently, there is no federal exemption specifically designed to protect EIC. However, some states have created exemptions that protect a certain amount of EIC refunds. As a result, check your state's exemption laws (or talk to a bankruptcy attorney in your area) to see whether you can exempt your EIC prior to filing your case.

If your state doesn't offer an EIC exemption, you may still be able to exempt it by using a wildcard exemption. A wildcard exemption can be used to protect any type of property in bankruptcy. But keep in mind that not all states have wildcard exemptions.

To learn more about how to use exemptions, see our Bankruptcy Exemptions page.

Options If You Can't Exempt Your Earned Income Credit

If your state doesn't have any exemptions (such as an EIC or wildcard exemption) you can use to protect your EIC, consider delaying your bankruptcy filing until after you receive your refund and spend it. When you receive your EIC refund, you can spend it on living expenses such as your food, rent, or gas. This way, the trustee can't go after your refund because you've already spent it.

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