Can a Debtor Make Donations to a Charity or a Religious Organization While in Bankruptcy?

Quite frequently, the issue of what types of spending are allowed for someone who is in bankruptcy or in the process of considering filing is the same. One such type of spending that may raise some questions is that of charitable or religious contributions. The issue is an interesting one. Can a bankruptcy filer tithe to church or charity while in bankruptcy? What happens to such contributions made prior to filing?

On June 19, 1998, former President Bill Clinton signed the Religious Liberty and Charitable Donation Protection into law. The purpose of the law was to offer a measure of protection to the qualified charitable or religious donations made by a debtor before and during the bankruptcy filing. The provisions under the Religious Liberty and Charitable Donation Protection Act were subsequently incorporated into the Bankruptcy Code. Two of the most significant provision in that Act were:

• While in a Chapter 13 bankruptcy, a debtor is allowed to exclude up to 15% of her gross annual income from her disposable income if such amounts are earmarked for religious or charitable contributions. This provision is codified in §1325 (B)(2)(A)(ii) of the Bankruptcy Code.
• Pre-petition contributions would not be considered transfers if:
  1. The amount of the contributions do not exceed 15% of the debtor’s annual income for that year; or,
  2. The contributions exceed 15% of the debtor’s annual income but were consistent with the debtor’s pattern of past charitable or religious contributions. The issue of pre-petition contributions is addressed in §548 of the Bankruptcy Code. This would prevent the recipient of a qualified charitable or religious donation from being sued by a Chapter 7 trustee to recover the contribution or a Chapter 13 debtor being forced to repay those contributions.

Of course, a debtor’s contributions must be made to a qualified religious or charitable organization that meets the definition of the same under section 170 of the Internal Revenue Code. Some examples of organizations that meet this requirement include churches, synagogues, and certain charities organized for the public good.

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