Protecting Dependent Children in Bankruptcy

The United States welfare state is primarily designed to assist families with young children, often conditioning public benefits on participation in the labor market. The federal refundable Child Tax Credit provides direct cash payments to subsidize the economic needs of lower-income families struggling to raise dependent children and oftentimes serves as a buffer against falling into poverty. But if a family files bankruptcy seeking debt relief, they will likely be stripped of this public assistance because, in most jurisdictions, lower-income working families cannot exempt from creditors their Child Tax Credit refunds. Meanwhile, middle-class debtors can fully exempt a host of valuable financial assets. By blessing a different exemption regime based upon socioeconomic class, the bankruptcy system reproduces inequality. In the spirit of critical scholarship, the purpose of this Article is to shine a light on this differential institutional dynamic. In rectifying this inequity, we argue that Congress should make certain legislative amendments to either the Bankruptcy Code or the Internal Revenue Code to fully exempt refundable Child Tax Credits from trustees and creditors in bankruptcy. Allowing lower income families to keep their public assistance benefits will not subvert the carefully balanced nature of our bankruptcy laws but rather will preserve the dignity of hard-working families raising dependent children.