Vol. 17, No. 46November 18, 2013 minnlawyer.com

By Patrick Thorntonpatrick.thornton@minnlawyer.com

Property tax refunds are exemptfrom wage garnishments, according tothe majority of bankruptcy courtjudges for the district of Minnesota.Three of the five judges have ruled thatrefunds fall under the category of gov-ernment assistance based on need andcan be protected from creditors. This new development is a signifi-

cant one, said Bloomington bankruptcyattorney Craig Andresen. Bankruptcylaw allowed for wage garnishment of 25percent above the federal minimumwage. And trustees counted on theyearly refund checks as a reliablesource of income to pay back creditors,he said. Lower-income debtors nowhave more power to hold on to theirstate and federal refunds. Minnesota already treats the federal

earned income tax credit as govern-ment assistance and therefore exemptfrom wage garnishment. That money isusually received in February or Marchand is exempt from garnishment for sixmonths, or through August orSeptember. Minnesota property taxrefunds are mailed out in September, atwhich point the debtor is exempt foranother six months, or until sometimein February or March. There could be a few weeks where

the exemption doesn’t overlap,Andresen said, but for most of the year,the debtor would be immune to gar-nishment as long as the federal andstate benefits continue. U.S. Bankruptcy Judges Michael

Ridgway, Gregory Kishel and Katherine

Constantine have issued similar opin-ions on the question. The last two deci-sions were made in September. Almost all of Andresen’s clients

either get a renter’s credit, a propertytax refund or a federal income taxrebate. “For the longest time these refunds

have been a gravy train for thetrustees,” he said. “Now, they can’t win.If a property tax refund is relief basedon need, you can’t get that money if youare a high earner. And, the broker youare, the more money you’re eligiblefor.”

A tale of two casesAndresen represented Grace

Johnson, an 88-year-old Bloomingtonwoman, who filed for bankruptcy inMarch 2013. Andresen said Johnsonwas helping her daughter’s family outfinancially for many years and thedebt slowly built up. According to the bankruptcy court

documents, the value of her homewas approximately $200,000. Her solesource of income was $1,460 inmonthly Social Security checks. Shealso noted on her bankruptcy sched-ule that she received $250 a month,the pro-rated figure for her annualproperty tax refund of $1,946. Sheclaimed that money as exempt fromwage garnishment.The bankruptcy trustee objected to

Johnson exempting the refund check.Specifically taking issue with the cat-egorization of that money as “govern-ment assistance based on need.” Statestatute allows people to exempt pub-lic assistance dollars from creditors

or banks. Examples of public assis-tance dollars are: SupplementalSecurity Income, Medical Assistance,Minnesota Care, Medicare Part B pre-miums, general assistance and theMinnesota Family InvestmentProgram.In August, the two sides appeared

before U.S. Bankruptcy JudgeMichael Ridgway. (The trustee in the case, Nauni

Manty of Minneapolis, declined tocomment for this story.)According to court documents, the

trustee argued that property taxrefund checks did not fall under thatcategory. The money was not “need”based and could therefore be gar-

Hands off property taxrefunds, judges say

Refunds l Page 2

Craig Andresen

nished to pay back Johnson’s debt. The judge concluded that property

tax refunds are similar toSupplemental Security Income.Further, because the refunds areintended to provide relief for lower-income families, it satisfies the“based on need” component. Theorder was issued Sept. 11.The day after the Johnson decision,

Judge Constantine decided in rePadilla, a case that dealt with thesame question. Constantine also con-cluded that property tax refunds wereexempt. That was an oral order issuedfrom the bench, Andresen said.Both trustees appealed the deci-

sions.

Revenue Department’s stanceLake Elmo attorney Michael

Iannacone is the trustee for thePadilla case. (Padilla’s lawyer,Michael Davey of St. Paul, could notbe reached for comment.)Iannacone said he was flabbergast-

ed when debtors’ attorneys first start-ed to make the argument to exemptrefund checks. “I know that a lawyer’s job is to tun-

nel over, through or around the laws,but I have been doing this for a longtime and it was an unusual argument,”Iannacone said. “I happen to think it’sfundamentally wrong, but so far thepeople that matter don’t agree withme.”Following the Padilla decision, he

called the Minnesota Department ofRevenue, the body that issued therefund check. He asked if the depart-ment believed that Padilla receivedassistance based on need. “They told me they don’t administer

relief based on need,” he said. The bankruptcy judge based the

decision on the fact that Padilla was arecipient based on need “so I don’tknow how you can say that if thecommissioner says we don’t giverelief based on need,” he said.

‘Where does it end?’Additionally, Iannacone said there

are several policy implications withthe treatment of refund checks asexempt from wage garnishments.“If you get a property tax refund

every year, are you perpetually a

recipient of relief based on need?” hesaid. “I understand where the court iscoming from, but what about otherincome-based eligibility? What if yourkid qualifies for free and reducedlunch or gets a scholarship [to go tocollege]? Are you a recipient of reliefbased on need? Those judgmentshave to be made.”The recent bankruptcy decisions

have opened the doors to an endlessstream of ‘what ifs,’ he said. He also noted that the income cut-

off to receive a property tax refund is$90,000 a year: a comfortable livingfor someone to ask to be exempt fromwage garnishment. “Where does it start and where

does it end?” he said. “Under [thedecisions], there is no end in sight.”

Refunds ‘… what about other income-based eligibility?’Continued from page 1

Reprinted with permission of Minnesota Lawyer ©2013

““I happen to think it’s

fundamentally wrong,

but so far the people

that matter don’t agree

with me.”

—Michael Iannacone, bankruptcy trustee