In re Kirschner, 259 B.R. 416 (M.D. Fla. 2001)

A couple with $100,000 of debt filed for bankruptcy, but their petition was opposed by a bankruptcy trustee on the ground that the plan allowed them to donate ten percent of their income to their church. The trustee insisted that the proposed charitable contributions were not “reasonably necessary for the debtors’ maintenance and support” and therefore constituted disposable income that should be paid to their creditors.

A federal bankruptcy court ruled that the plan could not be denied on the basis of the debtors’ proposed contributions to their church. While all of a debtor’s disposable income ordinarily must be applied to creditors in order for a banktrupcy plan to be approved, there are exceptions. Congress enacted the Religious Liberty and Charitable Donation Act in 1998 in order to clarify that a bankruptcy plan no longer can be rejected because a debtor wants to make charitable contributions that do not exceed 15 percent of his or her gross annual income for the year in which the contributions are made (or a higher percentage if consistent with the debtor’s regular practice in making charitable contributions). Congress intended for the Act to “protect the rights of debtors to continue to make religious and charitable contributions after they file for bankruptcy relief.”

The court noted that the contributions the couple wanted to continue making to their church were less than 15 percent of their annual income, and so their bankruptcy plan could not be rejected on the basis of these contributions. This was so despite the enormous size of their debt. However, the court agreed that the couple should be required to prove to the bankruptcy court that they in fact are making the contributions to their church. It concluded, “The court concludes that it is appropriate to mandate that debtors provide documentation of their charitable giving to trustee in order to ensure that they are not fraudulently using the income allocated for charitable contributions as discretionary funds… . For example, debtors could request that their church provide them with a receipt for their contributions, as it provides a receipt for those seeking tax deductions for charitable giving.”

This article first appeared in Church Treasurer Alert, June 2002.