Background. A federal court ruled that tuition payments made to a church-operated school are not “charitable contributions,” and so a married couple’s bankruptcy plan could be rejected because of their insistence on continuing to make such payments. A married couple (the debtors) filed for bankruptcy protection. They had net monthly income of $5,770, expenses of $4,194, and $1,576 of disposable income. The bankruptcy plan provided for 36 monthly payments of $1,576 (total $56,736), which would pay $123,714 of unsecured creditors 25% of their claims. The debtors were devout Catholics, and asked the court to allow them to continue making monthly tuition expenses of $750 to send their children to a parochial school. They pointed out that the tuition was less than 15% of their gross annual income, and that the bankruptcy code permits debtors to make charitable contributions of up to 15% of their annual income. The bankruptcy trustee claimed that parochial school tuition does not qualify as a charitable donation, and that if the tuition payments were applied to creditors the total payments to creditors would more than double to 62% over three years.
A federal bankruptcy court noted that for a debtor’s bankruptcy plan to be approved, it must provide “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.” Disposable income is defined as “income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor, including charitable contributions.”
The court note that “in the absence of some compelling circumstance a private school education is not reasonably necessary.” Further,
these debtors have given no reason why their children need to attend parochial school, i.e., they have not shown that the public schools in their area are not adequate, and neither have they suggested any other special need to do so. The only reason advanced by them is preferential, i.e., their children have always attended parochial school because of the family’s strong religious ties. This argument addresses none of the compelling circumstances typically cited for finding private school tuition a reasonably necessary expense, and mere preference does not bring it within the meaning of the Act. Allowing these debtors to pay parochial school tuition which over the life of the plan will exceed the amount distributed to creditors, is to require general creditors to fund the private education of the debtors’ kids.
The court also rejected the debtors’ argument that parochial school tuition payments should be allowed because they constitute a charitable contribution. The court acknowledged that the bankruptcy code prohibits trustees from rejecting a bankruptcy plan on the basis of charitable contributions so long as the contributions do not exceed 15% of the debtor’s annual income. But it concluded that this provision did not apply to tuition payments even if motivated by religious beliefs:
Charitable or religious donations are just that, and in making such contributions the donor is not bargaining for a tangible quid pro quo, but is making a gift to support the religion of his/her choice. Here the debtors propose to purchase, under the guise of a so-called religious donation, a substantial asset—the private education of their children. Based upon the record and the applicable law, I conclude as a matter of law that parochial school tuition payments are not charitable donations within the meaning of the Act, and that the money proposed to be used by the debtors to make said payments is disposable income required to be distributed under the chapter 13 plan.
Relevance to church treasurers. 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 recovering a bankrupt debtor’s charitable contributions from a church if the amount of the contributions does not exceed (1) 15% 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.” When a bankruptcy trustee seeks to recover donations to a church that exceed 15% of the debtor’s annual income, the question becomes whether the higher donation is consistent with the practices of the debtor in making contributions. This case clarifies that the term “charitable contribution” under the bankruptcy code does not include tuition payments made to a church school since a debtor receives something of substantial value in exchange for the tuition payments. In re Watson, 299 B.R. 56 (D.R.I. 2003).
This article first appeared in Church Treasurer Alert, July 2004.