Can debtors be donors?

Recent bankruptcy reforms in the United States have been criticized for favoring credit card companies at the expense of the debtors and the poor by making it harder to file for bankruptcy. Jonathan Cohen at Charity 2.0 Blog Network pointed us in the direction of Michelle Singletary's recent column, "Charity begins, and ends, at creditor."

The courts used to allow debtors filing for bankruptcy protection to exempt up to 15 percent of their annual income from creditors for tithing or charitable donations. However, a judge in New York recently ruled that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, places limitations on a bankrupt donor's ability to tithe to their church before the creditors have been paid off.

In a New York case, a bankruptcy judge ruled that some debtors can't tithe or donate money to charity if they want federal bankruptcy protection. US Bankruptcy Judge Robert E. Littlefield Jr. ruled in August that because of the recent overhaul of the bankruptcy code, the $100 a week a New York couple wanted to give to their church had to go to creditors.

Under the new bankruptcy rules, which went into effect a year ago, debtors who file for bankruptcy must first undergo a means test. Those whose annual incomes are at or below a certain amount based on their state's median income are permitted to file for Chapter 7, which for the most part wipes out nonsecured debt.

However, if an individual or couple makes too much money based on the means test, they must file under Chapter 13, which requires debtors to repay their debts over three to five years. In a Chapter 13 filing, only certain "reasonable" expenses are allowed. What's left after those expenses are determined must be used to repay creditors.

Before the law went into effect, bankruptcy court judges were required to permit debtors to tithe a portion of their income on a regular basis. Specifically, the Religious Liberty and Charitable Donation Protection Act of 1998 allowed debtors filing for bankruptcy protection to exempt up to 15 percent of their annual income from creditors for tithing or charitable donations.

Congress has raced to explain that this is not how they intended the law to be used. Senators Orrin Hatch and Barack Obama to propose legislation that would allow individuals in bankruptcy to continue giving to churches and charities.

Obama, who voted against the 2005 bankruptcy legislation, said the bill would clarify that Congress didn't intend for the law to prioritize creditors over religious institutions and charities. The bill passed in the Senate and has now been referred to the House.

Regardless of your views on what this author sees as a deeply flawed bankruptcy reform, there are several good topics of debate in this story. Are restrictions on tithing paramount to restrictions on religious freedoms? Should donors who are deeply in debt continue to give to charities?

Even for donors that are not in bankruptcy, as more and more charities ask donors to use credit cards for automatic monthly donations or even single gifts - should charities care that these donations are adding to mountains of existing debt?