A debtor’s right to continue tithing or charitable contributions during bankruptcy was clarified when Congress passed the Religious Liberty and Charitable Donation Clarification Act of 2006. This law allows bankruptcy debtors to include charitable contributions as an expense when completing the bankruptcy Means Test and reduces the amount of disposable income available for unsecured creditors. Debtors are permitted to contribute up to fifteen percent (15%) of their yearly gross income.
To qualify as a charitable contribution, it must meet the following criteria:
- The contribution must meet the definition of “charitable contribution” found in 11 U.S.C. § 548(d)(3).
- The contribution must be made to a “qualified religious or charitable entity or organization” as defined by 11 U.S.C. § 548(d)(4).
- The contributions must not exceed 15% of the debtor’s gross income for the year.
The bankruptcy trustee and court will examine whether the debtor has a history of charitable contributions. Unfortunately, a kind and generous heart is not sufficient proof in a federal bankruptcy court. The judge and trustee will demand evidence of payment. Most trustees want actual receipts, such as cancelled checks or receipts. The typical procedure is to take the past year’s charitable receipts and divide by twelve.
Receipts can be problematic for the debtor who simply drops a few twenties in an envelope for the collection plate each Sunday. If you are contemplating bankruptcy and do not have adequate receipts for your charitable giving, start collecting documents immediately! Many churches now accept donations online, and donors receive a contemporaneous receipt for the gift; or pay by check and keep copies of the cancelled checks. Even three or four months of regular giving before a court hearing may be enough to convince a judge of your charitable sincerity, especially if you can provide evidence of pre-bankruptcy involvement with the church.
Some courts require the debtor to continue to provide evidence of charitable giving after a Chapter 13 plan is confirmed. Regular receipts to the trustee may be a condition of the bankruptcy case.
If you need bankruptcy relief, speak with an experienced bankruptcy attorney. Your attorney can advise you of your rights and obligations during bankruptcy and guide you along the path to a financial fresh start.