Bankruptcy Laws: Charitable Contributions and Tithing

Shortly after the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a controversy arose over a New York judge who ruled that debtors must pay back their creditors before they are able to donate to charitable organizations.  Although this loophole was quickly closed by the Religious Liberty and Charitable Donation Clarification Act of 2006, it highlights the importance of knowing what bankruptcy laws on charitable contributions for debtors. 

Introduction of a Means Test

The intent behind the 2005 law was to prevent abuse of the chapter 7 bankruptcy laws, which allow for total discharge of debts, rather than the chapter 13 code that calls for some repayment of outstanding debts.  The addition of a "means test" in order to qualify for chapter 7 bankruptcy meant that an accounting of the debtor's finances must be submitted to the court and approved for chapter 7.  It is this "means test" in which charitable giving was questioned as a "legitimate" deduction in the New York case, because the income amount including giving would have forced the couple filing for bankruptcy into chapter 13.   

Safeguarding Charities

Bankruptcy laws are also meant to safeguard charities.  Before 1998, it was common for creditors to pursue charities to return money given to them by a debtor.  However, with the passage of the Religious Liberty and Charitable Donation act of 1998, up to 15% of a donor's income in the year before he declared bankruptcy was considered unrecoverable, and more if such giving had been a regular practice for the debtor. 

Giving as Part of Monthly Expenses

Can you give to charities if you have filed for bankruptcy today?  The answer is yes, if you have been giving to charities all along.  It doesn't really matter whether you filed for chapter 7 or chapter 13, as long as you can show that your giving is part of a continued history of giving.  Being able to consider giving as part of monthly expenses can also help to reduce the amount of money ultimately paid to creditors.  By listing their monthly contributions as part of expenses, debtors are able to reduce their monthly plan payment. 

But be careful.  The courts don't look kindly on a sudden gift of $10,000 to the local church right before you filed for bankruptcy if you have not given a cent to them before.  In fact, doing so might end you up facing fraud charges.

Finding Legal Help

Anyone considering bankruptcy should consult a bankruptcy attorney as soon as possible.  This article is for informational purposes only and is not intended to replace the advice of a professional attorney.