Charitable Contributions and Disposable Income

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Apr 2000

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Chapter 13 has long been a mechanism whereby unsecured creditors can reap distributions from debtors'
available post-petition income. Distributions to general unsecured creditors in chapter 13 cases have risen
to provide that, in many cases, the distribution can be meaningful and valuable.<a href="#1" name="1a">1</a>

In an effort to maximize distributions to creditors and to unify the treatment of chapter 13 cases across
the country, in 1984 Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of
1984.<a href="#2" name="2a">2</a> These amendments were enacted as a response to deal with certain consumer abuses, including
abuses in chapter 13.3 Included in the 1984 amendments was a provision requiring that chapter 13
debtors either pay 100 percent of their allowed unsecured claims or, for a period of at least three years,
that debtors pay all of their disposable income into the plan. Disposable income was 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 dependent of the debtor." Applying this provision, courts have
examined debtor's expenses and applied various subjective lifestyle presumptions. Courts have denied
confirmation for a variety of excessive personal expenses incurred by debtors: a $450 per month rental
payment and a $1,600 per month payment on a home mortgage were in excess of the necessary rental
value of comparable transportation and housing;<a href="#4" name="4a">4</a> maintaining payments on two cars in a family was
excessive when one of the cars was used by the unemployed debtor to drive grandchildren to and from
school;<a href="#5" name="5a">5</a> payments toward pension fund borrowings;<a href="#6" name="6a">6</a> contributions to voluntary and involuntary
retirement systems;<a href="#7" name="7a">7</a> payments toward a mortgage on a vacation home;<a href="#8" name="8a">8</a> veterinary expenses and
livestock feed for old horses and dogs owned by the debtor;<a href="#9" name="9a">9</a> monthly payments of $292 for the
acquisition of a lawn tractor to mow the debtors' one-acre homestead;<a href="#10" name="10a">10</a> monthly payments on a Blazer
costing $416 per month ["an absurd luxury bordering on the lifestyles of the rich and famous rather than
the reasonable lifestyle of a chapter 13 debtor"];<a href="#11" name="11a">11</a> and $150 per month for telephone expenses.<a href="#12" name="12a">12</a>

<blockquote><blockquote>
<hr>
<big><center>
...it does appear that a debtor's charitable contributions may not be subject to either the reasonableness standard of §1325(b) nor, if reform is enacted, subject to the limitations imposed by the expense
allowances of the Internal Revenue Service.
</center></big>
<hr>
</blockquote></blockquote>

One type of expenditure, however, has engendered a great deal of judicial and now legislative scrutiny.
Charitable contributions, including contributions of a religious nature, have been the subject of heated
litigation. After the 1984 amendments, cases such as <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Bein, 95 B.R. 281 (Bankr. D. Conn. 1989)</a>,
questioned whether it was appropriate for a bankruptcy court to disallow charitable contributions of a
religious nature in applying the all disposable income test. This case, however, is in a distinct minority, and
most courts have held that charitable contributions, including religious charitable contributions, are not
reasonable and necessary for the maintenance and support of a debtor or dependent of the debtor. In the
case of In re Lees,<a href="#13" name="13a">13</a> a monthly contribution to a debtor's church of $200 was held to violate the provisions
of §1325(b). Similarly, in In re Tessier,<a href="#14" name="14a">14</a> a $100 per month contribution to the debtor's church was
inappropriate.<a href="#15" name="15a">15</a>

Just as judicial response to discretionary charitable contributions was solidifying, Congress enacted
the Religious Liberty and Charitable Donation Protection Act of 1998.<a href="#16" name="16a">16</a> The 1998 amendment modified
the provisions of §1325(b) such that "the maintenance or support of the debtor or a dependent of the
debtor" includes certain charitable contributions to a qualified religious or charitable entity as defined in
§170(c)(1) of the Internal Revenue Code so long as the charitable contribution did not exceed 15 percent
of the gross income of the debtor for the year in which the contribution was made.

At first blush, the 1998 amendment appears to provide a "safe harbor" for up to 15 percent of a
debtor's otherwise disposable income for purposes of discretionary charitable contributions. In the recent
case of In re Cavanagh,<a href="#17" name="17a">17</a> the bankruptcy court strictly construed

the language of newly amended §1325(b)(2)(A). The plain language of this section "sets forth
Congress' specific intention to establish a limit for charitable contributions at 15 percent of the debtor's
gross income." The court held that the plain language of §1325(b)(2)(A) authorized a debtor to make
charitable contributions of up to 15 percent of gross income and the court need not apply any
reasonableness test to such a contribution. So long as the debtor's charitable contributions were within
a 15 percent limit allowed by §1325(b), the court could not hold that the contributions would preclude
confirmation of a plan because of a lack of good faith. Further, that a chapter 13 debtor increased
charitable contributions over pre-petition conduct was not dispositive. Congress did not make any
distinction between a debtor's new charitable contributions as opposed to the pre-petition contributions
made to a charitable entity.

A contrary conclusion was reached by the Louisiana bankruptcy court in the case of In re Buxton.<a href="#18" name="18a">18</a>
Judge Schiff examined the language of §1325(b)(2) and noted that the 1998 amendments did not remove
from the definition of "disposable income" the "reasonably necessary" requirement. Thus, disposable
income is still defined as income received by the debtor that is not reasonably necessary to be expended
for the maintenance and support of the debtor or a dependent of the debtor. Although the 1998
amendments make clear that living expenses may include charitable contributions (overturning the line of
cases that prohibited charitable contributions by a chapter 13 debtor), Congress clearly intended to put a
limitation on a debtor's right to make charitable contributions. Because living expenses must be reasonable,
so too must a debtor's charitable contribution be reasonable. The court therefore determined that
§1325(b) permits some discretionary spending as a reasonably necessary expense. Chapter 13 debtors are
free to spend such reasonable discretionary income on recreation, vacation, charity or anything else they
choose. Thus, the court concluded that charitable contributions can be a necessary expense, but only if the
debtors are willing to pay for charitable contributions with their discretionary funds. This gives debtors
making religious contributions no more right to discretionary income than other debtors merely because
they wish to make a religious donation.

Congress now has before it substantial proposals to amend the consumer provisions of the
Bankruptcy Code. Under the House version of the bill, the means test of §707(b) precludes a court
from taking into consideration whether a debtor has made or continues to make a charitable
contribution to a religious or charitable entity or organization.<a href="#19" name="19a">19</a>

While the case law is not clear, it does appear that a debtor's charitable contributions may not be
subject to either the reasonableness standard of §1325(b) nor, if reform is enacted, subject to the limitations
imposed by the expense allowances of the Internal Revenue Service. By continued sheltering of charitable
contributions in the reform legislation, consumer debtors will be given the opportunity to avoid the impact
of the means test, whatever it turns out to be, and avoid the scrutiny of lifestyle that the all disposable
income test has imposed on chapter 13 debtors.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Statistics collected by the National Association of Chapter 13 Trustees indicate that general unsecured creditors receive annual
distributions in chapter 13 cases approaching $600 million. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. L. 98-353, 98 stat. 333</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, Jeffrey W., "Substantive Consumer Bankruptcy Reform in the Bankruptcy Amendments Act of 1984," 27
Wm. & Mary L.Rev. 91 (1985)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Huntebrinker, 224 B.R. 405 (Bankr. E.D. Mo. 1997)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Walsh, 224 B.R. 231 (Bankr. M.D. Ga. 1998)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995)</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Delnero, 191 B.R. 539 (Bankr. N.D.N.Y. 1996)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Nation, 236 B.R. 150 (Bankr.
S.D.N.Y. 1999)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Jaiyesimi, 236 B.R. 145 (Bankr. S.D.N.Y. 1999)</a>. <a href="#7a">Return to article</a>

<a name="8">8</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Dick, 222 B.R. 189 (Bankr. D. Mass. 1998)</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Wyant, 217 B.R. 585 (Bankr. D. Neb. 1998)</a>. <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Zaleski, 216 B.R. 425 (Bankr. D. N.D. 1997)</a>. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 432</a>. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Williams, 201 B.R. 579 (Bankr. M.D. Fla. 1996)</a>. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 756 (Bankr. D. Mont. 1994)</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 396 (Bankr. D. Mont. 1995)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> See, also, note, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… in Chapter 13—A Divine Creditor Exception to §1325," 110 Harvard L. Rev. 1125
(1997)</a>; Martin, Aric D., "Chapter 13 and the Tithe: Is God a Creditor?", <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Ohio St. L J. 307 (1995)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of June 19, 1998, Pub. L. No. 105-183, 112 stat. 517 (1998)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 707 (Bankr. D. Mont. 2000)</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 606 (Bankr. W.D. La. 1999)</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> H.R. 833 §102(a). <a href="#19a">Return to article</a>

Journal Authors

Henry E. Hildebrand

Journal Date

Saturday, April 1, 2000 - 12:00