Opinion
Bankruptcy No. 11-00064.
June 30, 2011
ORDER RE: TRUSTEE'S OBJECTION TO CLAIM OF EXEMPTION
This matter came before the Court on Trustee's Objection to Debtor's Claim of Exemption. Renee K. Hanrahan appeared as Chapter 7 Trustee. Steven G. Klesner appeared for Debtor Pamela White. The Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
STATEMENT OF THE CASE
Debtor claimed a portion of her accrued income tax refunds exempt under two Iowa garnishment protection statutes. Trustee timely objected to Debtor's claim of exemption. The Court sustains Trustee's objection to Debtor's claim of exemption.
FINDINGS OF FACT AND PARTIES' ARGUMENTS
Debtor filed for bankruptcy on January 13, 2011. Debtor filed Amended Schedules B and C on March 22, 2011. On her Amended Schedule C (list of property claimed as exempt), Debtor included accrued income tax refunds valued at $5,839.00. Debtor claimed $1,250.00 of her income tax refunds exempt under Iowa Code §§ 627.6(10) and 627.6(14). Debtor also sought to exempt most of the remaining refund money by claiming that 75% of her accrued income tax refunds are exempt under Iowa Code §§ 642.21 and 537.5105.
Trustee objects only to Debtor's claim that 75% of her tax refunds are exempt under Iowa Code §§ 642.21 and 537.5105. Those sections of the Iowa Code limit the amount of money that a collecting creditor may garnish from an individual debtor's earnings. Trustee argues that Debtor's accrued income tax refunds are not "earnings" or "disposable earnings" under the two garnishment protection statutes. As a result, Trustee claims Debtor may not claim 75% of her accrued income tax refund exempt under those two sections.
Debtor resists Trustee's Objection. Debtor argues that her tax refunds are derived solely from her wages. As such, she claims the tax refunds should not lose their classification as "earnings." Debtor argues she can thus claim her accrued income tax refunds exempt as earnings under the Iowa garnishment protection statutes.
CONCLUSIONS OF LAW AND DISCUSSION
The beginning point of the analysis is 11 U.S.C. § 522(b)(3)(A). That section permits a debtor to exempt from the bankruptcy estate "any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of filing of the petition. . . ."Id. Iowa is an "opt-out" state, which means Iowa has elected to have its exemptions apply in Federal Bankruptcy proceedings as specifically allowed by the Bankruptcy Code. In re Hurd, 441 B.R. 116, 118 (B.A.P. 8th Cir. 2010); In re Roberts, 443 B.R. 531, 536-37 (Bankr. N.D. Iowa 2010); Iowa Code § 627.10. The question is the effect of Iowa exemption law in these proceedings.
Under the applicable Bankruptcy Rules, when a debtor claims an exemption, the trustee or any interested party must object or the exemption will be deemed approved by operation of law. Roberts, 443 B.R. at 537; In re Meyer, 392 B.R. 416, 419 (Bankr. N.D. Iowa 2008). Under this rule, the Trustee has the burden of proving Debtor's exemptions are not properly claimed. Fed.R.Bankr.P. 4003(c); see also Hurd, 441 B.R. at 118.
In this case, Debtor claimed accrued income tax refunds exempt insofar as Iowa Code §§ 642.21 and 537.5105 restrict garnishment of the tax refunds. Debtor claimed these exemptions in addition to the exemption for tax refunds provided in Iowa Code § 627.6(10) and the so-called "wildcard" exemption in § 627.6(14). Section 627.6(10), formerly § 627.6(9)(c), states:
A debtor who is a resident of this state may hold exempt from execution the following property: . . . 10. In the event of a bankruptcy proceeding, the debtor's interest in accrued wages and in state and federal tax refunds as of the date of filing of the petition in bankruptcy, not to exceed one thousand dollars in the aggregate. This exemption is in addition to the limitations contained in sections 642.21 and 537.5105.
Id. (emphasis added). Section 627.6(14) (the wildcard exemption) states:
A debtor who is a resident of this state may hold exempt from execution the following property: . . . 14. The debtor's interest, not to exceed one thousand dollars in the aggregate, in any cash on hand, bank deposits, credit union share drafts, or other deposits, wherever situated, or in any other personal property whether otherwise exempt or not under this chapter.
Id. (emphasis added). The combined effect of § 627.6(10) and § 627.6(14) allows a debtor to exempt up to $2,000.00. Here, Debtor claims $500.00 exempt under § 627.6(10) and $750.00 exempt under § 627.6(14). Trustee does not object to these exemption claims. Debtor seeks to hold most of the remainder exempt under the combined effect of the garnishment protection statutes, § 642.21 and § 537.5105.
The first garnishment protection statute, Iowa Code § 642.21, incorporates the garnishment protections of the federal Consumer Credit Protection Act into Iowa law. Section 642.21 also imposes its own protections. The first sentence of § 642.21 states that "[t]he disposable earnings of an individual are exempt from garnishment to the extent provided by the federal Consumer Credit Protection Act, Title III, 15 U.S.C. § 1671- 1677 (1982)." Iowa Code § 642.21(1) (emphasis added). Section 642.21 also sets out maximum garnishment amounts based on an employee's earnings. In doing so, § 642.21 specifically defines "earnings" and "disposable earnings" as follows:
3. For the purpose of this section:
a. The term "earnings" means compensation paid or payable for personal services, whether denominated as wages, salary, commission, bonus, or otherwise, and includes periodic payments pursuant to a pension or retirement program.
b. The term "disposable earnings" means that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.
§ 642.21(3).
Section 537.5105 of Iowa's Consumer Credit Code also limits the amount of money a collecting creditor may garnish from a debtor. Unlike § 642.21, it does not define "earnings," but it does contain the same definition of "disposable earnings." Iowa Code § 537.5105(1)(a). Section 537.5105 adds another layer of garnishment protections in addition to the provisions of section 642.21:
a. In addition to the provisions of section 642.21, the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment to enforce payment of a judgment arising from a consumer credit transaction may not exceed the lesser of twenty-five percent of the individual's disposable earnings for that week, or the amount by which the individual's disposable earnings for that week exceed forty times the federal minimum hourly wage prescribed by the Fair Labor Standards Act of 1938, 29 U.S.C. § 206(a)(1), in effect at the time the earnings are payable.
b. In the case of earnings for a pay period other than a week, the administrator shall prescribe by rule a multiple of the federal minimum hourly wage equivalent in effect to that set forth for a pay period of a week.
§ 537.5105(2).
The Eighth Circuit Bankruptcy Appellate Panel has held that Iowa's garnishment protection statutes are available for a debtor's use in bankruptcy. In re Irish, 311 B.R. 63, 67 (B.A.P. 8th Cir. 2004). A bankruptcy debtor need not have a garnishing creditor in the traditional sense to apply Iowa Code §§ 642.21 and 537.5105 as state law exemptions. Id. at 67-68. In Irish, the BAP determined that a debtor could exempt from property of the estate the debtor's accrued, unpaid wages "by utilizing both the $1,000 exception for wages and tax refunds in Iowa Code § [now 627.6(10)] in addition to any amount [debtor] could protect from creditors under the garnishment protection statutes of §§ 642.21 and 537.5105." Id. at 70.
In Irish, the debtor sought to exempt accrued unpaid wages, not tax refunds. The issue here is whether Debtor's accrued income tax refunds are "earnings" or "disposable earnings" such that they may be exempted under the garnishment limitations set forth in those sections.
As Judge Shodeen noted in a recent case in the Bankruptcy Court for the Southern District of Iowa, § 642.21's definitions of "earnings" and "disposable earnings" and § 537.5105's definition of "disposable earnings" mirror the federal Consumer Credit Protection Act's definitions of those words. In re Arthur, Nos. 10-00463-als7, 09-04332-als7, 2010 WL 4674450 at *3 (Bankr. S.D. Iowa Oct. 20, 2010); 15 U.S.C. § 1672(a)-(b). For this reason, this Court, like the Court in Arthur, first applies the United States Supreme Court's opinion which held the term "earnings" in the federal Consumer Credit Protection Act did not include a debtor's income tax refund. Kokoszka v. Belford, 417 U.S. 642, 651-52 (1974). There, the Supreme Court held a debtor could not exempt 75% of an income tax refund using the Consumer Credit Protection Act's limitation on wage garnishment. Id.
Since Kokoszka, a majority of federal bankruptcy and appellate courts with jurisdiction in "opt out" states like Iowa have held that tax refunds do not qualify as "earnings" under a state garnishment protection statute. As such, a debtor may not exempt accrued income tax refunds under garnishment protection statutes in bankruptcy. See, e.g., In re Annis, 232 F.3d 749, 753 (10th Cir. 2000) (Oklahoma garnishment exemption statute); In re Wallerstedt, 930 F.2d 630, 632 (8th Cir. 1991) (Missouri garnishment exemption statute); Arthur, 2010 WL 4674450 at *3 (Iowa garnishment protection statute); In re Sebastian, No. 08-60340-7, 2008 WL 5063084 (Bankr. D. Mont. Nov. 5, 2008) (Montana garnishment exemption statute); In re Rangel, 317 B.R. 553 (Bankr. D. Kan. 2004) (Kansas garnishment exemption statute). The Court believes the following reasoning from the Supreme Court's decision Kokoszka is particularly applicable here:
Congress did not enact the Consumer Credit Protection Act in a vacuum. The drafters of the statute were well aware that the provisions and the purposes of the Bankruptcy Act and the new legislation would have to coexist . . . Congress' concern was not the administration of a bankrupt's estate but the prevention of bankruptcy in the first place. . . .
Debtor is correct that income tax refunds are derived from her wages. See In re Honomichl, 82 B.R. 92, 94 (Bankr. S.D. Iowa 1987) (non-wage-earner spouse not entitled to an exemption for tax refund derived from joint debtor's wages). However, tax refunds do not qualify as "earnings" under Iowa's garnishment protection statutes just because they are traceable in some way to wages. Wallerstedt, 930 F.2d at 632 (citing Kokoszka, 417 U.S. at 651). "Just because some property interest had its source in wages . . . does not give it special protection, for to do so would exempt from the bankrupt estate most of the property owned by many bankrupts, such as savings accounts and automobiles which had their origin in wages." Kokoszka, 417 U.S. at 648. The Court holds Trustee has met her burden of proving Debtor is not entitled to her claim of exemption.
WHEREFORE, Trustee's Objection to Claim of Exemption is SUSTAINED.