Religious Contributions Not Considered in Dischargeability of Student Loans

The court is not required to take religious contributions into consideration when deciding whether a debtor is entitled to discharge student loans, according to District Judge Alvin K. Hellerstein of New York, who upheld a decision by Bankruptcy Judge Mary Kay Vyskocil.

Unfortunately, the debtor did not present compelling facts to support an argument that the First Amendment or the Religious Freedom Restoration Act of 1993 compels the deduction of religious contributions in deciding whether the repayment of student loans imposes an “undue hardship” under Section 523(a)(8).

The 67-year-old debtor graduated from law school at age 38 but never passed the bar exam. Though not disabled, he had not worked since 2014. In 2013, he had earned $70,000. Now, the debtor’s only source of income was about $1,300 a month in Social Security benefits. Together with his wife, the family’s current monthly income was almost $6,000.

In the four years before bankruptcy, the debtor and his wife had made annual religious contributions ranging from $12,000 to almost $25,000.

After receiving a general discharge in chapter 7, the debtor filed suit to declare that almost $340,000 in student loans were dischargeable.

In November, Bankruptcy Judge Vyskocil decided that the student loans were not dischargeable. The debtor appealed, but Judge Hellerstein affirmed in an opinion on June 12.

On appeal, the debtor primarily relied on the argument that the failure to consider his religious tithing violated his statutory and constitutional rights under the First Amendment, the Religious Freedom Restoration Act of 1993, or the RFRA, and the Religious Liberty and Charitable Donation and Protection Act of 1998, or the RLCDPA.

In the RLCDPA, Congress amended several provisions in the Bankruptcy Code to protect religious giving. For example, Sections 548(a)(2) and (d)(2) preclude specified religious contributions from avoidance as fraudulent transfers, including gifts amounting to not more than 15% of gross annual income. Section 707(b) precludes the consideration of religious contributions in deciding whether the court should dismiss a chapter 7 petition for “abuse.”

Judge Hellerstein said there is a split of authority on the treatment of religious gifts in the evaluation of “undue hardship.” Some courts, he said, hold that religious and charitable gifts are per se excluded from the undue hardship test. Others allow deductions of up to 15% implied by the RLCDPA, while a third group of courts “apply a context-specific assessment of the expense’s reasonableness,” he said.

Judge Hellerstein said that the debtor’s reliance on Section 707(b) was “unavailing.” That section, he said, “plainly does not apply to the circumstances of this case, or circumscribe a court’s analysis under Section 523(a)(8).”

Judge Hellerstein upheld Judge Vyskocil’s employment of a “context-specific analysis,” because “Congress has mandated neither the inclusion nor exclusion of charitable and religious donations from the scope of the Section 523(a)(8) analysis.”

Given the size of the debtor’s contributions, the bankruptcy judge had found that they were excessive. Judge Hellerstein ruled that the bankruptcy court properly excluded the contributions from the “undue hardship” analysis because the expenses were “unreasonable.”

Judge Hellerstein also rejected the debtor’s arguments based on the RFRA, 42 U.S.C. § 2000bb et seq. He said that the RFRA “does not govern the result here.” He added that the debtor’s reliance on the RFRA “is also inconsistent with Congress’ subsequent legislation of the RLCDPA,” because “Section 523(a)(8) was not among the sections amended by Congress.”

Judge Vyskocil found no First Amendment violation because Section 523(a)(8) is a neutral law and was not designed to promote or restrict religion. Judge Hellerstein said that Judge Vyskocil did not err in her analysis.

Overall, Judge Hellerstein held that Judge Vyskocil “did not err in considering the reasonableness of [the debtor’s] religious expenditures.”

Even if the bankruptcy court should have considered religious contributions, Judge Hellerstein ruled that the debtor still would have failed the Brunner test.

The debtor’s monthly net income was about $6,000 and expenses were some $4,500, leaving a surplus of roughly $1,500. Even allowing a 10% charitable contribution of $600, Judge Hellerstein said the debtor still could cover $826 a month toward student loans under an income-contingent repayment program.

Consequently, the debtor failed the first Brunner test, which requires a finding of undue hardship. Judge Hellerstein went on to rule that the debtor also failed the other two prongs of the Brunner test.

In short, debtors need a better test case for deciding whether religious contributions must be deducted from income in litigation over the discharge of student loans.