Bankruptcy law forbids tithing, charitable donations

The change in the updated bankruptcy law has led a New York judge to reluctantly decide that debtors who make above the state's median income cannot donate to charities or tithe to a church until they've paid back their creditors. The ruling could affect Americans who follow a religion and end up filing bankruptcy.

According to the 2004 General Social Survey conducted by the National Opinion Research Center, 86 percent of Americans are religious, and two-thirds of those who belong to a congregation "actively participate."

The ruling in the New York case is that debtors Frank and Patricia Diagostino cannot tithe to their church until their creditors are paid. The couple will have to wait five years, until they finish paying their creditors, before they can continue a tradition they have honored for years.

"We're not talking about sporadic giving here," says the couple's consumer bankruptcy attorney, Jerry C. Leek. "This was a part of their life. They were tithers to their Catholic church for 20 years, and they wanted to continue that practice."

The decision didn't just upset debtors; it also startled the congressional leaders who championed the revisions in the bankruptcy code.

"Sen. Orrin Hatch was very surprised by how the bankruptcy court in New York interpreted the law," says Peter Carr, spokesman for Sen. Hatch, R-Utah. He is not alone. Hatch, along with Sen. Chuck Grassley, R-Iowa, and Sen. Jeffrey Sessions, R-Ala., all sponsors of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, have problems with the decision.

Interpreting a revised law In March, the Diagostinos filed a voluntary Chapter 13 repayment bankruptcy. Among the documents they submitted to the U.S. Bankruptcy Court for the Northern District of New York was their statement of current monthly income and the calculations form used for the means test.

The means test is a new component of the bankruptcy law. It determines if the debtor is eligible to wipe out his or her debt in a Chapter 7 bankruptcy or if the debtor must repay creditors over a three- to five-year Chapter 13 repayment plan. The test considers the debtor's income and subtracts reasonable expenses. Its purpose is to restrict access to Chapter 7 bankruptcies.

Leek says the couple included the amount of $100 per month for "continued contributions" as a "legitimate" deduction, such as food, mortgage payments or rent.

But the $1,200 per year contribution to the Diagostinos' church, multiplied by the five years of their Chapter 13 plan, would provide an additional $6,000 to their disposable income, moving it from $74,351.25 to $80,351.25. This would increase the percentage of money returned to unsecured creditors.

A couple of months after the Diagostinos filed bankruptcy, the bankruptcy trustee, who is appointed by the court to distribute the estate, raised an argument. The trustee, Andrea Celli, pointed out that since the debtors' income was above the state's median income the debtors must apply the standards in the Internal Revenue Service's "National Standards for Allowable Living Expenses." Lawmakers made the IRS's set of allowed expenses a part of the means test as a way to establish reasonable standards. The information has typically been used for consumers who owe delinquent taxes and need to enter into a payment plan with the IRS.

Celli claimed that under the IRS's category of "other necessary expenses," the debtors did not qualify for a charitable contribution deduction.

IRS spokeswoman Nancy Mathis explains, "necessary expenses are those that provide for the health and welfare of the taxpayer and family or for the production of income. A charitable contribution can be an allowable expense if it is part of a job requirement or a condition of employment. Otherwise it is disallowed."

Leek argued that the Religious Liberty and Charitable Donations Protection Act of 1998 made clear that Congress intended to allow people to make charitable deductions.

The law was enacted to protect tithing and charitable giving under the bankruptcy code. It addressed the right of debtors to tithe after declaring bankruptcy under Chapter 13. The measure was authored by Sen. Grassley, Hatch and Sen. Sessions.

However, the New York bankruptcy court judge, Judge Robert E. Littlefield Jr., ultimately sided with the Chapter 13 trustee. He noted that according to the statute, if a person's income is less than the state's median income the IRS standards don't apply. That means if their income is more than the state's median income the IRS standards do apply.

'Reasonably necessary' expenses The judge determined that "charitable contributions" is not listed as a "reasonably necessary" expense allowed within a subsection of the bankruptcy law, the IRS doesn't say anything indicating that the debtors' charitable contributions provide for the health and welfare of the debtors or are for the production of their income, and the Diagostinos don't make charitable contributions in the context of their employment since neither is a minister. "The court does not agree with this awkward, bifurcated congressional framework, which makes charitable giving easier for some debtors and not others."

Littlefield says. "Whether tithing is or is not reasonable for a debtor in bankruptcy is for Washington to decide. However, consistency and logic would demand the same treatment of all debtors under Title 11."

Leek says the couple is unhappy that they can't participate in tithing. "They have to be noncharitable and nonreligious," he says.

Still, he says he's going to recommend that the Diagostinos not appeal the ruling.

"It would cost them $10,000 to appeal a $6,000 dollar issue."

Effects of the ruling David Skeel, scholar-in-residence at the American Bankruptcy Institute and law professor at University of Pennsylvania, thinks that the situation may need congressional intervention.

"We are either relying on another case to interpret the decision differently or Congress to change the provision. It's crystal-clear that this is not what the 2005 amendments were intended to do. The court's opinion is defensible based on what the current statute says."

Meanwhile, although the decision doesn't bind judges in other districts, it may cause bankruptcy attorneys to notify their clients of the change.

Consumer bankruptcy attorney Brett Weiss in Olney, Md., says he will warn his clients. He says he has had a number of clients who tithe, and the ruling puts consumers in a "horrible dilemma."

"People file because overwhelming majorities have had horrible things happen to them," he says. "And now we have to say, 'Well, you might not be able to fix things if you continue to tithe.'"

Creditors may have supported the new law, but not all are supporting the recent decision.

"Certainly the industry does not want to see this happen, and the opinion deserves a closer look," says Laura Fisher of the American Bankers Association, which represents creditors.

Mark Swan, an attorney who represents creditors in bankruptcies in Salt Lake City, says unless a creditor has a significant claim, he doesn't think creditors are going to raise the issue.

"Let's say I'm a credit card creditor who's owed $1,000 and objecting to the tithing raises the disposable income another few percentage points. As a creditor I'm not going to raise an objection to get another $10 or $20." He believes the ruling will become more of an issue with the Chapter 13 trustees.

"I suspect in Utah, because of our prevalence of tithe-givers, the judges may continue to allow charitable contributions."

Architects of revised law intervene Because the Department of Justice oversees Chapter 13 trustees, Sen. Grassley, Hatch and Sen. Sessions contacted U.S. Attorney General Alberto Gonzales on Sept 15.

In their letter, they "urged the Department to file court papers in appropriate cases to correct this misinterpretation, as well as issue mandatory guidance to Chapter 13 trustees so that they do not object to reasonable charitable contributions in Chapter 13 repayment plans. "For people of faith in America, the obligation to tithe presents a significant part of the free exercise of religion, which is guaranteed to all Americans under the First Amendment," wrote the senators.

"As the lead sponsors of both these important bankruptcy statutes, we can assure you that Congress never intended to exclude reasonable tithing in bankruptcy repayment plans."

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