Thursday, March 15, 2012

How are Charitable Contributions treated in a Bankruptcy?

The Bankruptcy Court will evaluate any regular charitable contributions made by a debtor who is also seeking the protection of the bankruptcy court.  The code seeks to strike a balance between maximizing the amount of funds available to pay the creditor's debts, and also to enable the debtor to engage in reasonable charitable giving.  This means that the Court can reject this portion of a debtor's budget in certain circumstances.

Often this issue is raised in Chapter 13 cases where the debtor is claiming a regular expense paid directly to a religious institution (e.g. "tithing"), but can also arise in the context of other regular charitable giving.

The bankruptcy code makes clear that a court “is not supposed to engage in a separate analysis to determine whether charitable contributions up to fifteen percent are reasonably necessary for the debtor’s maintenance and support.” See Drummond v. Cavanagh (In re Cananagh), 250 B.R. 107, 112 (B.A.P. 9th Cir. 2000).  Despite the plain meaning of the statute, some courts have interpreted the code to subject charitable contributions to two limitations. First, that the amount of the contribution cannot exceed 15 percent of the debtor’s gross income, and, second, that the amount of the contribution itself is reasonable. See In re Buxton, 228 B.R. 606, 609 (Bankr. W.D. La. 1999).

The statute requires a three step test to determine if a charitable contribution may be excluded from a debtor’s disposable income and therefore available to pay creditors.

  • First, the contribution must be a “charitable contribution” as defined by 11 U.S.C. § 548(d)(3)
  • Second, the contribution must be made to a “qualified religious or charitable entity or organization” as defined by 11 U.S.C. § 548(d)(4)
  • Third, the contributions must not exceed 15 percent of the debtor’s gross income for the year in which the contributions are made.

Therefore, provided a debtor's charitable contributions are to a qualified charitable entity and do not exceed fifteen percent of the debtor's income, such contributions are presumed reasonable. 

However, a New York bankruptcy court judge, Judge Robert E. Littlefield Jr., has made an exception to this test.  He has determined that in certain circumstances, a debtor's contributions may be determined to be unreasonable, particularly if the debtor's income falls under the IRS median income for the debtor's relevant jurisdiction. Judge Littlefield noted that according to the statute, if a person's income is less than the state's median income the IRS standards don't apply.  The reason for this distinction is because the allowance for reasonable charitable contributions is provided under the IRS standards; and because the IRS standards for income deductions only apply in cases where the debtor's income exceeds the IRS median family income.

So, if you regularly contribute to a charitable organization, and are considering bankruptcy, be sure to discuss those contributions with your bankruptcy attorney beforehand, in order to avoid objection by the bankruptcy trustee.

For more information about bankruptcy contact Attorney Trask or call 508.655.5980.

Also, if reading this post put you in a charitable mood we invite you to donate to the One-Mission Buzz-Off, which is a charity to benefit Children's Hospital Boston and the vital programs and services they provide to help kids beat cancer.  In support of this charity Attorney Kelsey will GO BALD on June 3, 2012 at their annual Buzz-Off.

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