Bankruptcy – Part 1

A bankruptcy court in Montana ruled that a bankruptcy trustee could not object to a couple’s bankruptcy plan.

Church Law and Tax 2001-05-01


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. Again, this protection applies to debtors whose bankruptcy plan calls for making charitable contributions of less than 15 percent of their gross annual income, or more if they can prove a pattern of giving more.

A bankruptcy court in Montana 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 in the amount of 7 percent of their gross income. A married couple filed a bankruptcy petition under Chapter 13 of the Bankruptcy Code. The bankruptcy trustee opposed the plan on the ground that the couple were not applying all of their disposable income to their creditors. In particular, the trustee noted that the couple would continue paying contributions to their church in an amount equal to 7 percent of their gross income. 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. The Religious Liberty and Charitable Donation Protection Act of 1998 amended the Bankruptcy Code to define disposable income to exclude charitable contributions “in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made.” Since the couple’s contributions to their church amounted to 7 percent of gross income they were permissible and did not amount to discretionary income.

Application. The Religious Liberty and Charitable Donation Protection Act of 1998 provides important protections to churches and church members. This historic legislation is addressed fully in a feature article in the May-June 1999 issue of this newsletter. One of the key protections of the Act prevents bankruptcy trustees from objecting to bankruptcy plans on the ground that the debtor proposes to continue making charitable contributions so long as the amount of the contributions does not exceed (1) 15 percent of the debtor’s income or (2) more than 15% of the debtor’s income if the contributions were “consistent with the practices of the debtor in making charitable contributions.” In re Cavanagh, 242 B.R. 707 (D. Mont. 2000).

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