By Ryan C. Wood
Something many people do without notice or praise is contribute money to their favorite charitable organization each month. It is not uncommon for people to continue to make donations even during times of hardship if they are able to do so. They do this for many reasons, their faith in their religion, their connection to the charities purpose or the desire to help their fellow man. Is there such as thing as contributing too much to a charitable organization if finances are tight and filing for bankruptcy protection? The answer to this question is yes, at least according to some jurisdictions.
In the case of Wadsworth v. The Word of Life Christian Center (In re: McGough), No. 12-1142 (December 2013), the Tenth Circuit held that charitable contributions over 15% are avoidable in its entirety. Mr. & Mrs. McGough filed for Chapter 7 bankruptcy protection on December 31, 2009. For the 2008 year, the McGoughs contributed $3,478 to the Word of Life Christian Center in 25 contributions. In 2009, the McGoughs contributed $1,280 in seven contributions. The McGough’s taxable income was $6,800 in 2008 and $7,487 in 2009. The McGoughs also receive $22,036 in social security benefits in 2008 and $23,164 in 2009.
There are limits on how much can be donated to a charitable organization when filing bankruptcy.
The trustee assigned to the case, David Wadsworth, and his bankruptcy lawyer, filed an adversary proceeding against Word of Life Christian Center to recover the 2008 and 2009 contributions the McGoughs made to it under 11 U.S.C. §548(a)(1)(B) and §550. An adversary proceeding is a lawsuit filed within the main bankruptcy case seeking to have some issue resolved by the court. Under §548(a)(1)(B), the trustee has the power to avoid certain transactions. Under §548(a)(2), transfers to charitable organizations won’t be subject to avoidance by the trustee if (a) the amount of the contribution doesn’t exceed 15% of the gross annual income of the debtor for the year in which the contribution is made; or (b) even if the contribution exceeded 15%, the transfer is consistent with the practices of the debtor in making charitable contributions. You might wonder why there is even a question of the McGoughs approaching this 15% mark. The McGough’s total income for 2008 was $28,836 and $30,651 for 2009. The contributions are only 12% in 2008 ($3,478 / $28,836) and 4% in 2009 ($1,280 / $30,651), isn’t it? The answer is no. Social security benefits are not included in the calculation of income for bankruptcy purposes. Therefore, the contributions are 51% in 2008 ($3,478 / $6,800) and 17% in 2009 ($1,280 / $7,487). Ironically this is a circumstance in which having social security income actually was a negative for the bankruptcy filer. Under most circumstances not having to count income towards total monthly gross income for eligibility to obtain a discharge is a good thing and a benefit to the bankruptcy filer.
The main question in the case is whether the trustee can recover the entire amount contributed to the Word of Life Christian Center or only the amount that exceeds the 15% contribution. Word of Life Christian Center’s bankruptcy lawyers of course only believe the trustee may only recover the amount of the charitable contributions that exceed the 15% contribution limit. The court in this case believes that §548(a)(2) provides a safe harbor from the trustee’s avoidance powers only if the transfer doesn’t exceed 15% of the gross annual income. If it does exceed 15% of the gross annual income, then the entire transfer is subject to avoidance. The court states that if Congress intended for only the portion that exceeds 15% contribution to be avoided, they would have added language to that effect. While this decision arguably is consistent with the rules of statutory interpretation the result seems to not make sense. If a 15% charitable contribution is allowed, then how can the whole contribution be avoided? So one bankruptcy filer donates 14.99% of their gross income and the charitable organizations can keep the donation while another bankruptcy filer donates 15.1% and the whole donation is subject to be avoided and turned over to the bankruptcy trustee? Something does not seem fair.
What is also confusing about this case is why the Word of Life Christian Center’s bankruptcy attorneys did not argue the other exception under §548(a)(2): that the transfer is consistent with McGoughs’ practices in making charitable contributions. The McGoughs contributed $3,478 in 2008 and $1,280 in 2009. We do not have information about what the contributions were for the years prior to that, but that could have been an argument in their case to fit within the exception.
If you have any questions about charitable contributions and how it affects your bankruptcy case you should seek the advice of an experienced bankruptcy lawyer in your jurisdiction for more information about the bankruptcy process.
