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 Religious Liberty and Charitable Donation Protection Act plays a crucial role in protecting charitable donations in bankruptcy by preventing bankruptcy trustees from recovering charitable donations made by debtors before filing for bankruptcy.
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. The bankruptcy court assesses the legitimacy of these transfers, focusing on whether they adhere to established thresholds and are consistent with past practices, to determine if they can be considered exempt from recovery by creditors.
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. Contributions to qualified religious organizations are protected under the Bankruptcy Code. 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 disposable income, which is assessed by the bankruptcy court, affects their ability to make charitable contributions. 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.
Giving to charities and religious institutions is a common and valued practice. Contributions to a charitable entity are protected under the Bankruptcy Code. However, when facing financial difficulties, questions arise about how these donations intersect with bankruptcy law. Let’s delve deeper into how bankruptcy laws view these contributions, how they can be protected, and potential issues to be aware of.
Bankruptcy law recognizes the importance of supporting charitable and religious causes, even during times of financial strain. The Religious Liberty and Charitable Donation Protection Acts safeguard the rights of individuals to make charitable contributions while filing for bankruptcy, stating that donations up to 15% of a debtor's gross income are exempt from being reclaimed by bankruptcy trustees. While certain pre-bankruptcy transfers can be scrutinized as “fraudulent transfers,” the Bankruptcy Code explicitly provides exceptions for charitable and religious contributions.
In bankruptcy, a fraudulent transfer occurs when a debtor transfers assets to someone else for less than their fair value within a specific timeframe before filing. This can include selling a car for significantly less than it’s worth or gifting a valuable item to a family member. The look-back period for most transfers is two years, but it can be extended to six years for transfers to family members.
If a transfer is deemed fraudulent, the bankruptcy trustee can “avoid” it, essentially undoing the transaction to recover the property or its value for the benefit of creditors. However, under the Religious Liberty and Charitable Donation Protection Act, charitable contributions are protected as long as they do not exceed 15 percent of a debtor's gross annual income.
Fortunately, the Bankruptcy Code provides significant protection for charitable and religious contributions. As long as your donation to a religious or charitable organization doesn’t exceed 15% of your gross income for the year it was made, it’s generally not considered a fraudulent transfer.
Bankruptcy trustees are generally prohibited from recovering charitable contributions made by bankrupt debtors to churches or charities if the donations are under this 15% threshold, unless those contributions were made with intent to defraud creditors.
Moreover, even if the contribution surpasses the 15% threshold, it can still be protected if it aligns with your typical giving patterns. This means that if you’ve consistently donated a certain amount to charity, even exceeding 15% of your income, it’s less likely to be challenged.
While the law offers safeguards for charitable and religious contributions, there are some key points to remember:
Intent to Defraud: If the trustee can prove that your donation was made with the specific intent to defraud your creditors, it might not be protected.
Excessive Contributions: If your charitable or religious donations exceed 15 percent of your gross annual income, especially in the period leading up to bankruptcy, they could raise red flags.
Consult Your Attorney: If you have questions about how your donations will be treated in bankruptcy, always consult with your bankruptcy attorney. They can help you understand the specific rules and regulations and ensure your charitable intentions are protected.
The rules for charitable giving during bankruptcy differ slightly depending on whether you file Chapter 7 or Chapter 13:
Chapter 7: After filing Chapter 7, you can generally continue making charitable donations, as long as the funds or property are exempt from the bankruptcy estate. However, it’s crucial to consult with your attorney to avoid any potential issues.
Chapter 13: In Chapter 13, you’ll create a repayment plan that includes your regular charitable contributions. The trustee will assess your overall financial situation and may adjust your plan if the contributions are deemed excessive.
The Bankruptcy Code also provides protections for religious liberty under the Religious Liberty and Charitable Donation Protection Act. This act ensures that bankrupt debtors can make charitable contributions without these donations being reclaimed by bankruptcy trustees, allowing donations of up to 15% of a debtor's gross income without being classified as fraudulent transfers.
While the Bankruptcy Code aims to protect charitable and religious donations, it's crucial to strike a balance between your philanthropic goals and your financial obligations to your creditors. An experienced bankruptcy attorney can help you navigate this balance, ensuring that you can continue supporting the causes you care about while also achieving a fresh financial start.
At LifeBack Law Firm, we understand the importance of charitable giving and religious contributions. Our experienced Minnesota bankruptcy attorneys are dedicated to helping you navigate the legal landscape, protect your assets, and maintain your financial integrity. Contact us today for a free consultation to discuss your situation and learn how we can assist you in achieving your financial goals.
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!
In most cases, yes. Bankruptcy law generally allows for continued charitable and religious contributions during bankruptcy, as long as they are reasonable and not excessive. However, it's important to consult with your bankruptcy attorney to understand the specific rules that apply to your situation.
Donations made within two years of filing could be scrutinized by the bankruptcy trustee as potential fraudulent transfers. However, contributions to a qualified religious or charitable entity are generally protected under Section 548 of the Bankruptcy Code, as long as they don’t exceed 15% of your gross income for the year or are consistent with your typical giving patterns.
The trustee can potentially "avoid" or undo a charitable donation if they can prove it was made with the intent to defraud creditors. However, this is rare, especially if the donation falls within the allowable limits and is consistent with your past giving habits.
There's no strict limit, but excessive donations might raise concerns with the trustee, especially in a Chapter 13 case where you're repaying some of your debts. Your bankruptcy attorney can advise you on a reasonable amount to donate based on your income and expenses.
Large donations made shortly before filing for bankruptcy could be more closely scrutinized by the trustee. However, even large donations can be protected if they are consistent with your regular giving practices and weren't made with fraudulent intent. It's essential to disclose all pre-bankruptcy donations to your attorney so they can assess any potential issues.
Yes, you can include reasonable charitable contributions as part of your Chapter 13 repayment plan. However, the trustee will review your budget and may request adjustments if the donations are deemed excessive in relation to your overall financial situation.
The best way to address any concerns about charitable donations in bankruptcy is to consult with an experienced bankruptcy attorney. They can help you understand the specific rules and regulations, assess your situation, and develop a plan to protect your charitable intentions while ensuring a successful bankruptcy outcome.