• Key point. Debtors are entitled to relief under Chapter 13 of the Bankruptcy Code if they are applying all of their disposable income to their creditors. Disposable income is income that remains after the payment of reasonably necessary expenses. Many courts have ruled that tuition expenses incurred in sending a child to a private church-operated school are a reasonably necessary expense that reduces disposable income. As a result, the continuing payment of such tuition expenses will not necessarily disqualify a debtor for bankruptcy protection.
A bankruptcy court in Florida ruled that a couple was applying all of their disposable income to their creditors and therefore their proposed plan for relief under Chapter 13 would be approved even though they were making monthly tuition expenses to provide their two minor children with an education at a private church-operated school. On April 16, 1999 a married couple filed a bankruptcy petition under Chapter 13 of the Bankruptcy Code. The couple listed monthly income of $7,500 in their petition along with monthly expenses of $3,000, leaving $4,500 to be paid to their creditors. Included in these monthly expenses was $600 for tuition expenses incurred in sending the couple’s two minor girls to a church-operated private school. The bankruptcy trustee objected to the couple’s bankruptcy plan on the ground that they were not applying all of their “disposable income” toward their debts. Specifically, the trustee claimed that the couple’s payment of private school tuition was not a reasonably necessary expense and therefore the couple were not committing all of their disposable income to their plan. The Bankruptcy Code requires Chapter 13 debtors to either pay 100 percent of unsecured claims or use all of their disposable income to fund their plan. The Code states that if the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless 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 make payments under the plan.” The term “disposable income” means income which is received by the debtor “and which is not reasonably necessary to be expended-(A) for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions to a qualified religious or charitable entity or organization in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made; and (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.”
The court noted that if the private school tuition expense were reasonably necessary for the support of the couple’s dependents, then the expense is not considered disposable income and the couple’s bankruptcy plan could be confirmed. The court acknowledged that “there is no bright line rule for what constitutes a reasonably necessary expense” and that the courts are split as to whether payment of school tuition is a reasonably necessary expense for a Chapter 13 debtor. The couple insisted that they had a deep commitment to providing their children with an education in a Christian school and that their children always had attended a private Christian school. The court concluded that this evidence supported a finding that the private school tuition was a reasonably necessary expense. It noted that these tuition expenses were expenses creditors should have anticipated would be incurred by the couple at the time credit was extended.
Application. Many churches operate private schools. This case will be a useful precedent to assist parents who file for bankruptcy protection and who want to keep their children in a church-operated school. In re Burgos, 248 B.R. 446 (M.D. Fla. 2000). See also In re Nicola, 244 B.R. 795 (N.D. Ill. 2000).
© Copyright 2001 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m05 c0301