Bankruptcy and Charitable Donations

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America is a nation of givers. Despite the recession and high unemployment, approximately 80% of Americans continued to give to religious and/or secular charities. Many people who've lost their jobs or accumulated large amounts of debt nonetheless continue to struggle to donate to churches and causes they believe in. Perhaps you're worried that declaring bankruptcy would put an end to your ability to donate. Or perhaps, even worse, you're afraid that the bankruptcy trustee would be able to recover any gifts you've made to your church in the past year.

In fact, bankruptcy laws protect both debtors' rights to donate and religious charities' rights to keep donated money. Debtors taking the 'means test' to determine whether or not they can file chapter 7, can allocate as much of their income to charity as desired- so long as the charitable giving is in line with past practices, and not merely a strategy to pass the means test. Similarly, Chapter 13 filers can use charitable contributions to reduce their disposable monthly income, and more importantly, reduce their monthly plan payment.

It's true that a series of bankruptcy cases had surprising and sometimes contradictory findings after the passage of the 2005 bankruptcy act. One prominent case in New York, in 2006, for example, found that Chapter 13 filers could not tithe or make any other donations until they had paid off their credit card debt. However, Congress quickly passed the Religious Liberty and Charitable Donation Clarification Act of 2006, which clarified that Americans filing Chapter 13 do have the right to make charitable donations. It built on another act of Congress, the Religious Liberty and Charitable Donation Act of 1998.

Prior to the 1998 act, bankruptcy trustees frequently sued for the return of charitable gifts. Some trustees argued that charitable deductions to churches were donated without any 'reasonably equivalent value' being given in return. Therefore, they should fall into the category of fraudulent transfers – payments made to one person or creditor that are more than what they owe, or what they're valued for, thus shortchanging everybody else. Bankruptcy attorneys argued no, that in fact the donor does receive something of value in exchange for the donation: preaching, teaching, spiritual instruction, etc. The trustees countered that the donor would receive those things whether or not they gave money. Many bankruptcy courts allowed the trustees to recover the money – which caused great hardship for some charities, who had already spent that money. However, the 1998 act clarified that gifts up to 15% of the donor's income in the year before bankruptcy are not recoverable. In addition, gifts of more than 15% may be exempt if the debtor can show that these are consistent with their past practices. If you have given 20% of your income to your church every year for the past five years, for instance, the church would be able to keep the entire 20%.

Do note, however that bankruptcy courts can still consider these donations fraud if they look like a deliberate attempt to not pay your creditors. The courts will look at timing, the amount of the payments, and the circumstances surrounding your gifts. So if you're an avowed atheist who hasn't been to church in ten years, and you suddenly decide to donate 15% of your income to the Church of the Fallen Brethren the day before you declare bankruptcy – watch out. The court will most likely consider that fraud.

However, if you've been consistently donating to your church over the years, declaring bankruptcy shouldn't hinder your ability to give them your financial support. In fact, bankruptcy could protect this support, and make it easier for you to give to an organization that really matters to you.

Think you may need to consider filing bankruptcy...or know someone who may need to. Keep the Law Offices of John T. Orcutt in mind, a North Carolina bankruptcy law firm offering a totally FREE and confidential initial consultation, with offices in Raleigh, Durham, Fayetteville and Wilson. Just call toll free to 1-800-899-1414 or visit their website at www.billsbills.com for tons of information about every aspect of bankruptcy and bankruptcy law.