• Key point. The Religious Freedom and Charitable Donation Protection Act of 1998 prevents creditors or bankruptcy courts from recovering contributions made by bankrupt debtors to their church, so long as the contributions were not fraudulent and did not exceed 15 percent of the debtor's annual income (or a higher percentage, if the debtor regularly gave more).
A Texas state court ruled that the recently enacted Religious Freedom and Charitable Donation Protection Act of 1998 prevented a creditor from recovering contributions made by a bankrupt debtor to his church. A former partner (the "debtor") was sued by other partners following the dissolution of a partnership, and a court ordered him to pay several thousand dollars in damages. The debtor d a bankruptcy trustee was appointed. The trustee later informed the debtor's church that the debtor's contributions to the church during the previous four years were "fraudulent transfers" because the debtor was insolvent at the time and did not receive a "reasonably equivalent value" in exchange for his contributions. The trial court agreed and ordered the church to turn over $23,428 in contributions. The church appealed this order, claiming that (1) the Religious Liberty and Charitable Donation Protection Act of 1998 prohibited the bankruptcy court from recovering any of the debtor's charitable contributions; and (2) the Religious Freedom Restoration Act and the first amendment guaranty of religious freedom prevented the bankruptcy court from recovering the debtor's contributions.