Bankruptcy trustees and courts permit debtors to make charitable and religious contributions. Reasonableness is the operative guideline, as it is in much else in the bankruptcy world. Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom. Even if tithes or charitable contributions are permitted, what is the limit? Is there a bright line rule? Or will the court evaluate such gifts on a case by case basis?
And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action? One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt. The case in question was In Re Lovell (N.D. Iowa, 2012).
In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization. She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.
She wished to continue her practice of charitable giving, and still discharge her student loans at the same time. She was employed and was making an income that placed her solidly in the middle class.
The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable. Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.
The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing: current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back. See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).
Of particular interest to the court was the fact that the debtor was still in the early stages of her career. This being the case, there was a substantial likelihood that her earning power would increase as the years went by. In addition, she stated that giving to her church was an important part of her religious beliefs.
Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense. This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith. Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions. Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.
The Religious Liberty and Charitable Donation Protection Act (RLCDP) is a factor in the background that courts have also been mindful of. See 11 U.S.C. 1325(b)(2)(A). Congress passed RLCDP as a remedial law after anecdotal evidence accumulated that charitable donations were being avoided as preferential transfers by bankruptcy trustees. Section 548 of the Bankruptcy Code was amended to allow charitable donations made in good faith, providing some relief to debtors and religious organizations with little ability to fight preference actions in bankruptcy court.
In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income. Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”
In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions. Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life. Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.