Congress Considers Bankruptcy Law Clarification
Legislation would ensure protection of charitable contributions from bankrupt donors.

Background. A bankruptcy trustee can reject a debtor's attempt to discharge debts through bankruptcy if doing so would be a "substantial abuse" of the bankruptcy law. "Substantial abuse" exists if a debtor has sufficient "disposable income" to pay off debts within a reasonable time. In the past, many courts ruled that it would be a substantial abuse of the bankruptcy law to permit debtors to reduce their disposable income by their church contributions. These courts denied bankruptcy protection to debtors who insisted on making contributions to their church.

Congress sought to fix this problem by enacting the Religious Freedom and Charitable Donation Protection Act in 1998. The Act specifies that disposable income does not include charitable contributions of up to 15 percent of a debtor's income (or more, if the debtor can demonstrate a consistent practice of giving more). This was good news for churches, since it meant that members who file for bankruptcy could continue to make contributions to their church.

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Posted: November 1, 2006
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