Many people frequently make regular donations to charities and religious organizations. Our laws generally promote and encourage these types of donations due to the positive impact it has on our social institutions and other members of society. For example, the IRS Tax Code allows for certain tax breaks for people and companies who make charitable donations. The Bankruptcy Code also specifically makes certain allowances for those who donate to religious organizations and charities.
The Bankruptcy Code disallows certain transfers of money or property that the debtor makes before filing for bankruptcy. One such type of transfer is known as a “fraudulent transfer.” This occurs when a debtor transfers money or property to someone else and does not receive equivalent value in exchange for it, within the 2 year time period before filing for bankruptcy. If the transfer of money or property is to a family member of the debtor, then the look-back period is actually extended from 2 years to 6 years. An example of a fraudulent transfer would be a debtor who sells a vehicle worth $10,000 to their friend for only $2,000 (or worse, gives it away to them for nothing), and then files for bankruptcy a year and a half later. If a fraudulent transfer occurs, the bankruptcy trustee has the right to “avoid,” or undo, the transfer. This means the trustee has the right to demand that the person to whom the transfer was made pay the trustee the value that the debtor should have received, or alternatively, to surrender the transferred property to the trustee. In the above example, the trustee could demand that the friend pay $8,000 (the difference between the value of the vehicle and the amount the debtor received), or that the friend turn the vehicle over to the trustee. If the friend refuses, the trustee even has the right to sue the friend to acquire the money or property. It’s also notable that if the debtor intentionally transferred the money or property with the actual intent to defraud their creditors, particularly in the one year period before filing their bankruptcy case, they are subject to having the court deny or revoke their discharge.
However, the Bankruptcy Code permits transfers of money or property to charities or religious organizations to a large extent. The Code explicitly provides that a charitable or religious transfer does not constitute a fraudulent transfer so long the contribution to the religious organization or charity does not exceed 15% of the debtor’s total gross income for the year that the transfer was made. The Code further provides, however, that even if the contribution to the religious or charitable organization exceeds 15% of the debtor’s gross income for that year, such contribution is still not a fraudulent transfer if it is consistent with the typical contributions made by the debtor to religious or charitable organizations. In any event, this does not mean that a debtor can intentionally circumvent the fraudulent transfer law simply by giving away a lot of money or property to a charity or religious organization. If it can be shown that the debtor made such a transfer with the actual intent to defraud their creditors, their ability to receive or keep their discharge is jeopardized and the trustee maintains the right to avoid the transfer.
Fraudulent transfers refer to those that occur before the debtor files their bankruptcy case. Once the debtor files their case, they are generally free to make contributions to charitable or religious organizations. In a chapter 7 case, however, the debtor should be very cautious so as to avoid making charitable or religious contributions from money or property, unless they are certain that it is “exempt,” or legally protected from being taken by the trustee to pay their creditors (in most cases it likely will be exempt). In a chapter 13 case, the debtor keeps all their property, but must make monthly payments to the trustee. Debtors are allowed to make regular contributions to charitable or religious organizations while also making their monthly bankruptcy payments. The debtor’s average estimated monthly charitable or religious contributions is listed in their expenses schedule (Schedule J) in the petition they file with the court. The trustee will generally allow the debtor to make reasonable regular contributions so long as they are able to pay a fair amount to their creditors, as well. If the debtor makes an excessive large contribution to the religious or charitable organization, the trustee will likely ask them to pay more to their creditors in exchange. The debtor’s attorney representing them in their bankruptcy case can best advise the debtor on what religious or charitable contributions will be appropriate and allowable in either a chapter 7 or chapter 13 case.
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This is a generalized overview of how charitable and religious donations are treated under bankruptcy law. A person considering filing for bankruptcy is always well advised to discuss their particular facts and circumstances with an experienced bankruptcy before filing their case. See us at LifeBackLaw.com!
