• Key point 9-09. Bankruptcy trustees are prohibited by the federal Religious Liberty and Charitable Donation Protection Act from recovering contributions made by bankrupt debtors to a church or other charity prior to declaring bankruptcy, unless the contributions were made with an intent to defraud creditors. This protection extends to any contribution amounting to less than 15 percent of a debtor's gross annual income, or more if the debtor can establish a regular pattern of giving more. In addition, the Act bars bankruptcy courts from rejecting a bankruptcy plan because it allows the debtor to continue making contributions to a church or charity.

* A bankruptcy court in Arkansas ruled that a bankruptcy trustee could not object to a couple's bankruptcy plan on the ground that they proposed to continue making contributions to their church. A married couple filed a bankruptcy petition under Chapter 13 of the Bankruptcy Code. The couple's bankruptcy plan called for the payment of $879 per month for 36 months to secured and unsecured creditors, which would satisfy less than 1% of unsecured creditors' claims. Their plan also called for the payment of monthly contributions to their church of $416, representing 9.8% of their monthly gross income. The bankruptcy trustee opposed the plan on the basis of the charitable contributions. The trustee insisted that the contributions should be redirected to the creditors.

Section 1325 of the Bankruptcy Code specifies that if a bankruptcy trustee objects to the confirmation of the plan, then the court may not approve the plan 'unless, as of the effective date of the plan … the plan provides that all of the debtor's projected disposable income to be received in the three year period beginning on the date that the first payment is due under the plan will be applied to made payments under the plan.' Disposable income is defined as income which is received by the debtor and which is not reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor.