Charitable donations are a regular part of people’s lives. Whether it is a religious organization or a different kind of charity, our society and our laws frequently take steps to encourage donations to these types of organizations. The IRS Tax Code allows for deductions from income for donations to these organizations and the bankruptcy code also specifically allows these types of donations to continue.
While it’s true that the bankruptcy code doesn’t allow certain transfers of money before filing, reasonable charitable donations don’t qualify as a “fraudulent transfer.” A fraudulent transfer is, for example, let’s say that before you file bankruptcy, you sell your car to your sister for $10,000 less than it’s worth, or you just give it to her. That’s called a fraudulent transfer because you are effectively “cheating” your creditors out of money they could have potentially recovered.
The bankruptcy code allows the transfer of money or property to charitable organizations to an extent. Under the code, you may transfer money to a charitable organization so long as it does not exceed 15% of your total gross income for the year in which the transfer was made. In cases where it does exceed 15% of your income, it is still not considered a fraudulent transfer as long as it was consistent with what you had been doing in the past. In other words, if you’ve given 20% of your income to charity, you may continue to do that. That said, it is imperative that your giving is in line with what you’ve done in the past. Otherwise, fraudulent transfer rules could kick in.
Once a debtor files their case, fraudulent transfer rules aren’t quite as big of a deal. You’re generally free to make charitable contributions. In a Chapter 7, debtors should be very cautious of transferring property to ensure that it is exempt (protected from the trustee) before transferring it. In a Chapter 13, you can continue to donate along with making your payments and it is counted as an ongoing expense. You may continue to make these reasonable donations so long as you can also make a fair payment to your creditors.
Of course, all of these situations require the guidance of an expert attorney. That’s where we come in. We have helped thousands of people successfully navigate the bankruptcy process. If you’re ready to take the first steps towards financial freedom, give us a call.