Available at SSRN: https://ssrn.com/abstract=6076686
Abstract:
For decades low-income families have relied on the filing of individual income tax returns to claim critical social welfare benefits in the form of refundable tax credits, most notably the Earned Income Tax Credit and the Child Tax Credit. But what happens to those families when the social safety net is not enough to meet their financial obligations, and they must seek a fresh start by filing for bankruptcy?
Summary:
Michelle Lyon Drumbl’s article—Poverty, Fresh Starts, and the Social Safety Net—is one of those rare pieces that bridges tax law, bankruptcy law, and anti-poverty policy in a way that actually matters to real people (and to the consumer lawyers who represent them).
At its core, Drumbl asks a deceptively simple question: If Congress designed refundable tax credits as part of the modern social safety net, why do bankruptcy systems so often treat them like disposable “estate assets” instead of lifelines?
What the Article Does Well
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Reframes refundable tax credits as welfare—without the stigma.
Drumbl carefully shows how the EITC and CTC function in practice like social benefits, even though they arrive through the tax system rather than a welfare office.She explains that this design choice—using the IRS rather than a social services agency—reduced stigma, lowered administrative costs, and made benefits feel “earned” rather than charitable. That matters enormously when bankruptcy judges are later asked whether these funds are “public assistance.”
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Explains why timing creates bankruptcy traps.
A recurring theme is that the very features that make the EITC and CTC effective—lump-sum delivery and annual filing—also make them vulnerable in Chapter 7.If a debtor files bankruptcy before the refund hits the bank account, trustees often treat it as estate property, even when it is clearly intended to pay for rent, utilities, car repairs, or medical bills.
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Shows how outcomes depend almost entirely on geography.
Drumbl maps the national landscape into four basic state approaches:-
States that explicitly exempt EITC (and sometimes CTC) in their exemption statutes;
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States that protect “public assistance” broadly enough to cover EITC;
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States that protect only state or local assistance (not federal benefits); and
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States that provide no protection at all.
The takeaway is brutal: two equally poor debtors can have opposite results based solely on their zip code.
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Highlights how courts often want to help—but say their hands are tied.
Drumbl surveys case law showing that bankruptcy judges are frequently sympathetic to debtors who need their refunds for basic survival—but still feel bound by narrow statutory language. The refrain is familiar to any consumer practitioner:“This is a problem for the legislature, not the court.”
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Uses COVID relief as a revealing case study.
Drumbl notes that Congress temporarily excluded COVID recovery rebates from the bankruptcy estate entirely under 11 U.S.C. § 541(b)(11). That move implicitly recognized what advocates have long argued: some money should never be up for grabs by a Chapter 7 trustee.Ironically, Congress did not clearly extend that same protection to the expanded 2021 Child Tax Credit, leading to messy litigation and inconsistent results.
Why In re Quevedo Matters (and why it should embarrass North Carolina)
I have previously written about In re Quevedo (M.D.N.C.), and Drumbl’s framework makes that case even more stark.
Quevedo is a textbook example of how the poorest debtors are often treated the worst in bankruptcy.
In that case, a low-income debtor’s EITC refund was sliced up between the trustee and the debtor, even though the money was plainly needed for basic household support. The court treated the refund less like “family subsistence” and more like a piggy bank to be raided for unsecured creditors.
Under Drumbl’s analysis, Quevedo sits squarely in the category of cases where:
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The credit is functionally public assistance,
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The debtor’s need is obvious,
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The judge is not hostile,
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Yet the statute still permits—and arguably compels—harsh treatment.
That is not a “hard case making bad law.” It is a bad statutory framework producing predictable injustice.
Contrast this with a debtor living just across the border in Virginia, where the entire amount would have been protected.
Quevedo illustrates exactly what Drumbl warns about: bankruptcy law has not caught up with the reality that refundable tax credits are now central to the social safety net.
Commentary:
Where We Should Go From Here (Legislative Fixes)
Drumbl’s most important contribution is not just diagnosis—it’s prescription:
1. A Federal Fix (the cleanest solution)
Ideally, Congress should:
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Exclude EITC and refundable CTC from the bankruptcy estate entirely, similar to what it did for COVID rebates;
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Create a uniform federal exemption specifically protecting these benefits in bankruptcy; and
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Excluding this amount from the calculation of Current Monthly Income under 11 U.S.C. §101(10A)(B)(ii).
That would eliminate the arbitrary state-by-state lottery that currently determines whether poor families keep their safety net.
Realistically, however, Congress moves slowly—if at all—on consumer bankruptcy issues. That makes state reform critically important.
2. A North Carolina Fix (the most practical near-term path)
A proposed amendment to N.C.G.S. § 1C-1601(a)(12) is exactly the kind of targeted, sensible reform Drumbl’s article implicitly calls for.
Under this proposal, the exemptions in North Carolina would be amended to provide :
“Alimony, support, separate maintenance, and child support payments or funds, and public benefits that have been received or to which the debtor is entitled, to the extent the payments or funds are reasonably necessary for the support of the debtor or any dependent of the debtor.”
This is a smart move for several reasons:
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It clearly covers EITC and refundable CTC.
By explicitly including “public benefits…to which the debtor is entitled,” this would remove the semantic gamesmanship trustees often use to argue that EITC is “just a tax refund.” -
It builds in a reasonableness standard.
The “reasonably necessary for support” language aligns with long-standing exemption principles and prevents abuse while still protecting vulnerable families. -
It treats tax-based benefits like child support.
That is normatively correct. If we exempt child support because it keeps children housed and fed, we should do the same for EITC—which often serves the identical purpose. -
It would prevent another Quevedo.
Under this proposed language, a debtor like Quevedo would have a far stronger argument that her refund was untouchable.
3. Why this reform matters beyond bankruptcy
Drumbl’s article—and the unfortunate result in Quevedo —together reveal something bigger:
Bankruptcy is increasingly becoming the place where the social safety net is either reinforced or dismantled.
If trustees can seize EITC refunds:
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Families miss rent
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Utilities get cut off
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Cars don’t get repaired
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Medical bills go unpaid
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Children suffer
That is not what a “fresh start” is supposed to look like.
This proposed amendment to exemptions would align North Carolina with the growing national recognition that refundable tax credits are not windfalls—they are survival money.
Bottom line:
Drumbl’s article provides the intellectual architecture; Quevedo provides the moral urgency; and the proposed statutory fix provides the practical path forward.
If North Carolina wants to be a state that truly gives low-income debtors a fresh start—rather than a last haircut—it should adopt this amendment to § 1C-1601(a)(12).
Anything less leaves us with a system where the poorest families continue to subsidize their creditors with the very funds Congress meant to keep them afloat, turning the EITC into yet another form of corporate welfare.
To read a copy of the transcript, please see:
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