Available at: https://wfujournaloflawandpolicy.org/volume-16-issue-2/
Introduction:
The North Carolina legislature has the opportunity to improve the lives of debtors in this state. To reflect the changing opinions towards bankruptcy, North Carolina is equipped to create a new state exemptions statute for the first time in over twenty years. In fact, the United States Bankruptcy Court for the Middle District of North Carolina suggests that “such concerns must be addressed by the North Carolina General Assembly.”1 In bankruptcy proceedings, a debtor’s right to exempt certain assets from the estate is deemed necessary for the debtor to support their family and ensure financial rehabilitation.2 Debtors may exempt the value of their homes, vehicles, and even personal property such as clothes or jewelry.3 Some states have taken a broader approach to what a debtor may exempt by allowing a debtorto exempt public assistance, like the Earned Income Tax Credit (“EITC”).4 States’ ability to create exemptions in bankruptcy is based on the presumption that states are best suited to define property rights.5 However, some commentators suggest that the expansion of state exemptions disadvantages creditors, resulting in higher interest rates for consumers, thus creating more harm than good.6 However, the expansion of state exemptions works to keep states in touch with changing attitudes towards bankruptcy, and ensures debtors truly have a “fresh start.” Part I of this Note will discuss the guiding bankruptcy policies at work in the background of all bankruptcy proceedings. Part II of this Note will describe the history and purpose of the EITC, and how it can be exempt in bankruptcy. Part III of this Note will discuss In re Quevedo, a recent Middle District of North Carolina opinion, and what influence it may have on the North Carolina legislature. Finally, Part IV of this Note will analyze the benefits and downfalls of state exemptions for the debtor, society, and the bankruptcy system. This Note argues that the North Carolina legislature should amend N.C. Gen. Stat. § 1C-1601 to create a provision that exempts “[t]he debtor’s right to receive an earned income tax credit under the federal tax laws and any moneys that are traceable to a payment of an earned income tax credit under the federal tax laws.”7 This would thereby create an explicit exemption for federal earned income tax credits. By doing so, the North Carolina legislature is creating change that is reflective of a general shift in attitudes towards bankruptcy and feelings towards “dishonest” debtors.
Introduction:
The North Carolina legislature has the opportunity to improve the lives of debtors in this state. To reflect the changing opinions towards bankruptcy, North Carolina is equipped to create a new state exemptions statute for the first time in over twenty years. In fact, the United States Bankruptcy Court for the Middle District of North Carolina suggests that “such concerns must be addressed by the North Carolina General Assembly.” In bankruptcy proceedings, a debtor’s right to exempt certain assets from the estate is deemed necessary for the debtor to support their family and ensure financial rehabilitation. Debtors may exempt the value of their homes, vehicles, and even personal property such as clothes or jewelry. Some states have taken a broader approach to what a debtor may exempt by allowing a debtor to exempt public assistance, like the Earned Income Tax Credit (“EITC”). States’ ability to create exemptions in bankruptcy is based on the presumption that states are best suited to define property rights. However, some commentators suggest that the expansion of state exemptions disadvantages creditors, resulting in higher interest rates for consumers, thus creating more harm than good. However, the expansion of state exemptions works to keep states in touch with changing attitudes towards bankruptcy, and ensures debtors truly have a “fresh start.” Part I of this Note will discuss the guiding bankruptcy policies at work in the background of all bankruptcy proceedings. Part II of this Note will describe the history and purpose of the EITC, and how it can be exempt in bankruptcy. Part III of this Note will discuss In re Quevedo, a recent Middle District of North Carolina opinion, and what influence it may have on the North Carolina legislature. Finally, Part IV of this Note will analyze the benefits and downfalls of state exemptions for the debtor, society, and the bankruptcy system. This Note argues that the North Carolina legislature should amend N.C. Gen. Stat. § 1C-1601 to create a provision that exempts “[t]he debtor’s right to receive an earned income tax credit under the federal tax laws and any moneys that are traceable to a payment of an earned income tax credit under the federal tax laws.” This would thereby create an explicit exemption for federal earned income tax credits. By doing so, the North Carolina legislature is creating change that is reflective of a general shift in attitudes towards bankruptcy and feelings towards “dishonest” debtors.
Summary:
The Note takes aim squarely at a gap in North Carolina exemption law that practitioners have been flagging for years—but which the bankruptcy courts have now made impossible to ignore after In re Quevedo.
In In re Quevedo, the court held that the Earned Income Tax Credit (EITC) does not fall within North Carolina’s existing exemptions—particularly rejecting arguments that it constitutes a “public assistance benefit” or other protected category under N.C. Gen. Stat. § 1C-1601. The result? For working families, the single largest anti-poverty tax credit in the United States can be swept into the bankruptcy estate and distributed to creditors.
This Note argues that outcome is not just harsh—it is out of step with both federal bankruptcy policy and modern state exemption trends. Many states have already enacted explicit EITC protections, recognizing that these funds are designed to support low-income households, not to boost creditor recoveries.
The proposal is straightforward: amend N.C. Gen. Stat. § 1C-1601 to expressly exempt the EITC and any traceable proceeds. That would bring North Carolina in line with a growing national consensus and reinforce the Bankruptcy Code’s core promise of a meaningful fresh start.
Commentary (because Quevedo wasn’t the last word—just the wake-up call)
Let’s be blunt: Quevedo didn’t necessarily create a policy problem— but it did expose one.
North Carolina’s exemption statute hasn’t kept pace with economic reality, and certainly not with the modern bankruptcy system. When a working debtor loses their EITC in bankruptcy, that’s not some abstract doctrinal issue—it’s rent, groceries, car repairs, or childcare walking out the door.
And the court in Quevedo essentially said: “Don’t look at us—talk to the General Assembly.” That’s not a dodge; it’s a roadmap.
1. The EITC is low-hanging fruit (and overdue)
Protecting the EITC is one of the easiest—and most defensible—fixes available:
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It is already recognized as an anti-poverty tool under federal law
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Many states explicitly exempt it
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It aligns cleanly with the “fresh start” principle
Failing to exempt it effectively converts a wage subsidy for working families into a creditor dividend. That’s not policy—it’s leakage.
2. But focusing only on EITC misses the bigger problem
Here’s where this Note should go further—and where practitioners need to push harder.
North Carolina doesn’t just have an EITC problem. It has an exemption problem.
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The homestead exemption ($35,000) hasn’t been updated since 2009
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It bears little relationship to current housing prices
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It routinely forces Chapter 13 filings (or worse outcomes) for homeowners with modest equity
The National Consumer Law Center has repeatedly highlighted how outdated exemption schemes undermine both debtor rehabilitation and system efficiency. North Carolina consistently lags behind.
3. The real reform agenda (hint: it’s not just one line item)
If the General Assembly is going to act—and Quevedo gives it the political cover to do so—it should think bigger:
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Index the homestead exemption to inflation or median home prices
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Expand protections for tax credits and public benefits, including EITC and Child Tax Credit
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Clarify wildcard and personal property exemptions to reflect modern household assets
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Incorporate recent reforms (like 529 and ABLE account protections) into a coherent framework
In other words, don’t just patch the roof—renovate the house.
4. The creditor-cost argument? Overstated and outdated
The Note fairly acknowledges the perennial objection: broader exemptions increase credit costs.
Maybe. Marginally.
But that argument ignores the countervailing realities:
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Bankruptcy already prices in risk
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Efficient fresh starts reduce repeat defaults
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Stripping basic supports (like EITC) increases long-term financial instability
If anything, failing to modernize exemptions may increase systemic costs—just not in ways that show up neatly in an APR.
Practice Pointer
Until the legislature acts, practitioners should:
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Carefully time bankruptcy filings around tax refunds
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Consider spending strategies prepetition (within ethical bounds)
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Evaluate Chapter 13 vs. Chapter 7 implications for refund retention
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Track any legislative movement—because once this changes, it will change fast
Bottom Line
Quevedo was not the end of the story—it was the invitation.
Protecting the EITC is the right first step. But if North Carolina is serious about aligning its exemption scheme with modern realities (and basic fairness), it needs to go further.
A fresh start shouldn’t depend on outdated statutes.
To read a copy of the transcript, please see:
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