Bankruptcy law forbids tithing, charitable donations
By Brigitte Yuille • Bankrate.com

A quirk in the new bankruptcy law could keep filers from tithing to their churches or making any charitable donations, for that matter.

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.