Professional Athletes and Bankruptcy: Symptoms of a bigger problem.

ESPN aired "Broke" last night, a documentary in their 30 for 30 series, which highlighted the financial problems that many professional athletes face.  While it may be difficult to feel bad for people who earn in one game check more than most of us earn in one year, the reality is that the same traps that lead to most consumer bankruptcies are exaggerated by the big paychecks that professional athletes receive at a young age.

The consumer culture of America glorifies spending over saving, and youth are at the greatest risk for falling into that trap.  Spending and creating debt on a larger scale by professional athletes gets out of hand in the same way that those habits bury the average individual.

Even living within your means when you have a job is not enough of a plan to reach the goals of safe retirement and ensure staying out of bankruptcy.  If you don't save as well, you won't have a safety net in the event of injury, unemployment, or other unexpected events.  The reason that bankruptcy is so likely among professional athletes is because injury and retirement at a young age are almost guaranteed in that business.

But you can learn from their mistakes by budgeting realistically, and having a plan for disability and retirement.  Even if you've found yourself in a position to file bankruptcy once, you can learn from that experience and use your fresh start to plan for your goals this time around.

In "Broke", Herman Edwards, a former NFL player and coach, was interviewed.  He speaks at the NFL rookie seminar about the importance of financial planning and in his interview he pointed out that "a goal without a plan is a wish."

So are you wishing, or planning?

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.