Recently I was counseling a married couple regarding bankruptcy and they asked me if  they would still be able to continue giving to their church if they file bankruptcy.

The simple answer is yes.

For people of faith in America, the giving of tithes and offerings represents a significant part of the free exercise of religion, which is guaranteed to all Americans under the First Amendment. Current bankruptcy law protects both debtors’ rights to donate and religious charities’ rights to keep donated money.

Debtors taking the Means Test to determine whether or not they qualify to file Chapter 7 bankruptcy can allocate as much of their income to charity as desired as long as the charitable giving is in line with past practices and not merely a strategy to pass the means test. Similarly, Chapter 13 debtors can use charitable contributions to reduce their disposable monthly income which will in turn reduce their monthly Chapter 13 plan payment.

However, not long ago, the situation was very different. Tithes and offerings and other charitable donations were usually not viewed as reasonable expenses for a person filing bankruptcy. Likewise, churches and other charitable organizations were sometimes sued by bankruptcy trustees and forced by bankruptcy courts to turn over gifts given them by individuals who later filed bankruptcy.

Thankfully, in 1998, Congress acted to protect the free exercise of religion from encroachment by bankruptcy courts and bankruptcy trustees when it passed the Religious Liberty and Charitable Donation Protection Act. This law was designed specifically to protect the giving of tithes and offerings in the context of bankruptcy.

The 1998 law clarified that tithes and offerings up to 15% of debtors’ income in the year before bankruptcy are not recoverable by a bankruptcy trustee. Additionally, gifts of more than 15% may be exempt if debtors can show that the gifts are consistent with their history of giving. For example, if you have given 20% of your income to your church every year for the past five years, your church would be able to keep the entire 20%.

However, Oklahoma bankruptcy courts as well as other bankruptcy courts across the United States would not allow a Chapter 13 debtor to include charitable giving in their monthly budgets unless the debtors were repaying 100% to their unsecured creditors. So Congress stepped in once again in 2006 and passed the Religious Liberty and Charitable Donation Clarification Act. This law clarified that Americans filing Chapter 13 bankruptcy have the right to include charitable donations as a reasonable expense in their monthly budgets as long as there is no deliberate attempt to avoid creditors.

One thing to be aware of regarding charitable giving is that it greatly helps if a person filing bankruptcy can prove his giving through canceled checks or by requesting a charitable giving statement from the church or other charitable organization. It also helps if the debtor can show that he has a long-term track record of charitable giving as opposed to just starting his giving on the eve of filing bankruptcy.

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