David A. Sosne, trustee in the bankruptcy proceeding of Ryd and Colleen Waller-stedt, appeals from the district court’s decision permitting the Wallerstedts to exempt certain state and federal income tax refunds from the bankruptcy estate under Mo.Rev.Stat. § 525.030(2) (1986). The trustee argues that when withheld and forwarded to the respective governmental treasuries, the Wallerstedts’ wages lost their character as earnings, and also that by its express language, the Missouri garnishment statute does not apply to income tax refunds. We reverse the district court’s judgment and hold that the Waller-stedts’ tax refunds are no longer earnings and are not exempt from the bankruptcy estate under Missouri law.
Both parties stipulated to the facts. In 1988 the Wallerstedts worked as laborers. At the end of the year they were entitled to income tax refunds totalling $5,357, $4,075 from the federal government and $1,282 from the State of Missouri. In re Wallerstedt, No. 89-02717 — BSS, slip op. at 1-2 (Bankr.E.D.Mo. Sept. 25, 1989). Before receiving these refunds, the Wallerstedts filed for protection under Chapter 7 of the federal Bankruptcy Code. On their schedule B-4, the Wallerstedts listed the tax refunds as earnings that are partially exempt from the bankruptcy estate pursuant *631 to section 525.030(2). 1
The trustee objected to the Wallerstedts’ claim of exemption, arguing that tax refunds are not “earnings of an individual.” The trustee also argued, in the alternative, that even if the refunds were “earnings,” Missouri's garnishment statute only exempts those earnings that remain after deducting “any amounts required to be withheld by law.” Section 525.030(2). 2
The bankruptcy court overruled the trustee’s objection, holding that the Waller-stedts’ tax refunds are “earnings” as that term is used in the Missouri garnishment statute. In re Wallerstedt, slip op. at 7 (Sept. 25, 1989); In re Wallerstedt, No. 89-02717-BSS, suppl. op. at 2 (Bankr.E.D.Mo. Oct. 31, 1989). The court also held that the tax refunds qualify for exemption from the bankruptcy estate because the language — “amounts required by law to be withheld” — in the Missouri statute denotes only the portion of an employee’s withheld earnings that is ultimately used to satisfy tax liability, and therefore does not apply to the Wallerstedts’ tax refunds. Slip op. at 5-7 (Sept. 25, 1989). On appeal, the district court affirmed the bankruptcy court’s rulings. Sosne v. Wallerstedt, No. 89-2026-0(4), slip op. at 4-5 (E.D.Mo. Apr. 3, 1990).
The trustee’s first objection to the Wallerstedts’ claim of exemption involves the characterization of income. The trustee claims that once an employer withholds a percentage of an employee’s income for the benefit of taxing authorities, that income loses its character as “earnings.” According to the trustee, by withholding income, the employer transforms it from “earnings” into something new, so that if the taxing authority later returns surplus withholdings to the employee, the money is no longer “earnings” but has become a “tax refund.” 3
The question before us, then, is whether an income tax refund is earnings or has been transformed by the withholding process into some other asset that the trustee is free to collect and distribute to creditors. On this issue, the district court held that “ ‘earnings’ do not los [sic] their character as such because they have been withheld by taxing authorities and then returned.”
Wallerstedt,
slip op. at 4. At the outset, we are inclined to agree. The practical reality to the taxpayers, who have had more of their earnings withheld than necessary to satisfy their tax liabilities, is simply a return of that excess to them. In many respects, the equities favor the debt- or on this issue, particularly in light of the general rule that courts should construe exemption statutes liberally in favor of the debtor.
Norwest Bank Nebraska, N.A. v. Tveten,
However, we do not decide this case in a vacuum. While the issue before us is one of state law, decisions on a similar issue under federal law have strong bearing on this case. In February 1974, a panel of this circuit decided
Gehrig v. Shreves,
The
Gehrig
decision directly conflicted with a Second Circuit bankruptcy case,
In re Kokoszka,
In reaching this conclusion, the Supreme Court relied on the rationale behind the Consumer Credit Protection Act, stating that “ ‘Congress’ concern [in passing the act] was not the
administration
of a bankrupt’s estate but the
prevention
of bankruptcy in the first place by eliminating ‘an essential element in the predatory extension of credit resulting in a disruption of employment, production, as well as consumption’ and a consequent increase in personal bankruptcies.’ ”
Id.
at 650,
Although the Supreme Court addressed the issue under the federal exemption scheme and in light of a federal garnishment statute, we are convinced that the same reasoning should apply to the Waller-stedts’ claim for exemption under the Missouri garnishment statute.
See Kokoszka,
We find further support for our conclusion in bankruptcy court decisions issued since
Kokoszka. In re Traux,
We reverse the decision of the district court and we deny the Wallerstedts’ claim of exemption for income tax refunds.
Notes
. In 1982 the Missouri legislature opted out of the federal exemption scheme pursuant to 11 U.S.C. § 522(b)(2) (1988), thereby restricting Missouri residents to the exemptions available under Missouri law and under federal statutes other than section 11 U.S.C. § 522(d). Mo.Rev. Stat. § 513.427;
In re Sanders,
. The statute states:
2. The maximum part of the aggregate earnings of any individual for any workweek, after the deduction from those earnings of any amounts required by law to be withheld, which is subjected to garnishment may not exceed (a) twenty-five percentum, or (b) the amount by which his aggregate earnings for that week, after the deduction from those earnings of any amounts required to be withheld by law, exceed thirty times the federal minimum hourly wage prescribed by section 6(a)(1) of the Fair Labor Standards Act of 1938 in effect at the time the earnings are payable, or (c) if the employee is the head of a family and a resident of this state, ten percen-tum, whichever is less....
Section 525.030(2) (emphasis added).
See In re Sanders,
.The trustee cites no authority for this proposition, but instead argues that this is an issue of first impression in this jurisdiction.