A federal bankruptcy court has ruled that the Religious Liberty and Charitable Donation Protection Act is constitutional. The Act prevents bankruptcy trustees from recovering donations made by bankrupt debtors to churches and other charities within a year prior to filing a bankruptcy petition, if (1) the donations do not exceed 15 percent of the debtor’s annual income, or (2) the donations exceed 15 percent of the debtor’s annual income but are “consistent with the practices of the debtor in making charitable contributions.” A bankruptcy trustee who was attempting to recover several thousands of dollars donated to a church by a bankrupt debtor within a year of filing for bankruptcy argued that the Act’s protection of charitable contributions was an invalid promotion of religion. The court rejected the trustee’s arguments, noting that the Act protects contributions made to virtually any charity, whether religious or not. This case is good news for churches. Witt v. Grace Fellowship, Inc., 231 B.R. 92 (N.D. Okla. 2000).
Tip. Church treasurers should understand the protections of the Religious Liberty and Charitable Donation Protection Act. If you receive a letter from a bankruptcy trustee demanding that you turn over donations made by a bankrupt debtor within a year prior to filing for bankruptcy, you do not need to comply provided that (1) the debtor’s donations during the year in question did not exceed 15 percent of his or her annual income, or (2) if the donations did exceed 15 percent of the debtor’s annual income, they are “consistent with the practices of the debtor in making charitable contributions.” For example, if the donations amount to 20 percent of the debtor’s income, the trustee cannot recover them if the debtor’s consistent practice was to give 20 percent of his or her income to the church.
This content originally appeared in Church Treasurer Alert, April 2001.