Adam Rosenzweig (Wash U), What is Tax Law’s Role in Bankruptcy’s Fresh Start? (JOTWELL) (reviewing Michelle Lyon Drumbl (Washington & Lee), Poverty, Fresh Starts, and the Social Safety Net, 98 Temp. L. Rev. 57 (2025) (reviewed by Noah Marks (North Carolina) here)):
While in private practice I confronted a situation where a bankrupt company was facing an unfortunate conundrum. The IRS had determined that the parent company had to claim a worthless stock deduction in the year of bankruptcy while the bankruptcy court ruled that the automatic stay prevented the parent company from doing so as it would have wiped out the NOLs of the bankrupt company. I had filed this incident away as nothing more than a mildly amusing legal anecdote, until reading Professor Drumbl’s recent article Poverty, Fresh Starts, and the Social Safety Net (“Fresh Starts”).
In Fresh Starts, Professor Drumbl confronts a question I had never considered before–what happens to refundable tax credits such as the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC) when a taxpayer declares bankruptcy? As an initial matter, this question appears to identify a relatively straightforward tension between tax and bankruptcy policy. On the one hand, refundable tax credits are clearly a valuable asset of a bankruptcy estate which could be used to satisfy creditors, while on the other hand both refundable tax credits and bankruptcy law are intended to protect or assist low-income taxpayers. By itself this proves to be an intriguing question involving a potential conflict of fundamental public policy underlying two comprehensive federal regimes. Yet, as Fresh Starts starkly demonstrates, that is only the beginning of the story.
Perhaps the most significant contribution of Fresh Starts is how it identifies and meticulously walks through how refundable tax credit treatment under the bankruptcy law varies significantly from State to State.
Bankruptcy law delegates this authority to the States; as succinctly stated in the Article, “[b]ankruptcy exemption provisions are a nuanced intersection of federal and state law.” Thus, notwithstanding that both the refundable tax credits and the bankruptcy laws are entirely creatures of Federal law, the treatment of bankrupt taxpayers can vary widely depending on the happenstance of the State in which the bankrupt taxpayer lives at the time of filing for bankruptcy. For example, according to the article, States such as Oklahoma and Nevada exempt the EITC but not the CTC from creditors’ claims, while Virginia and Ohio exempt both the EITC and CTC, while Kansas and Mississippi exempt the EITC but only up to a statutory cap. The article then contrasts refundable tax credits with other so-called “public assistance” exemptions which vary widely and in different ways from the substantially similar refundable tax credits with little to no apparent reason. …
Fresh Starts forced me to consider new issues from a new perspective which I had not previously considered. As a reader, that all I can ask for from legal scholarship. I highly recommend Fresh Starts as a successful piece of legal scholarship.
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