Congress passes bill to protect church pledges from creditors

Friday, June 5, 1998

Congress has sent a bill to President Clinton that would protect from creditors tithes and pledges that churches receive from people who have declared bankruptcy.

The U.S. House of Representatives this week unanimously approved the Religious Liberty and Charitable Donation Protection Act, which would amend the federal bankruptcy code to prevent bankruptcy judges from forcing churches and other tax-exempt, charitable organizations to return donations of up to 15 % of a debtor’s gross annual income. The Senate passed the bill last month. According to the bill’s chief House sponsor, Rep. Ron Packard, R-Calif., President Clinton is expected to sign the bill.

Currently the bankruptcy code treats a person’s donation to a church or charity within a year of filing for bankruptcy as a fraudulent transfer that is recoverable by bankruptcy trustees.

Several courts have ruled that the First Amendment’s free exercise of religion clause does not protect churches from relinquishing donations by parishioners or members who later filed for bankruptcy.

In April a federal bankruptcy court in Oregon ruled that a Baptist church could not keep tithes from members who filed for bankruptcy in 1996. The church had asked the court to bar the bankruptcy trustee from recovering the tithes, alleging that the recovery would violate the church’s religious-liberty rights as well as the family’s.

The federal court, however, ruled that the “recovery of prepetition tithes ‘may embarrass the debtor, but it does not burden the debtor’s ability to engage in the exercise of religion by making postpetition tithes.’”

In 1992 a federal court allowed a bankruptcy trustee to recoup a large sum of contributions from a Minnesota church, despite claims by the church that such an action subverted the free-exercise clause of the First Amendment.

Packard, who introduced the bill in the House, said the bankruptcy code needed to be amended to protect churches’ financial livelihood.

“Many churches and charities survive solely on day-to-day contributions,” Packard said. “It’s absolutely unbelievable that a place of worship or a charity can be held responsible for a debt they have nothing to do with.”

Steve McFarland, director of the Christian Legal Society’s Center for Law and Religious Freedom, testified before Congress earlier this year to urge passage of the amendment. McFarland singled out the Supreme Court’s Employment Div., v. Smith decision as a primary reason for altering the bankruptcy code.

“Since 1990, when the U.S. Supreme Court drastically reinterpreted the free exercise of religion clause, that clause of the First Amendment has been of little use to churches, synagogues and parachurch ministries,” McFarland said. “In the Smith decision, the high court ruled that the free-exercise clause cannot be invoked against a law that is facially neutral as to religion and generally applies to all persons, even if the effect of the law substantially burdens religious faith or practice.

“The Bankruptcy Code does not target religion specifically—it applies generally to all bankruptcy petitioners,” he said. “Consequently, courts across the land have found no free exercise problem with a bankruptcy trustee confiscating tithes and offerings, even when given in good faith to churches… .”

Packard’s bill states that even if a person makes a donation just before filing for bankruptcy, creditors still cannot seek repayment from the church or charity. Additionally, the bill allows the debtor to continue giving up to 15 % of her income to a church or charity for one year after filing for bankruptcy.

Lawyers and bankruptcy judges opposed to the bill, however, testified before Congress that the code should not be altered to satisfy special interests.

Upon passage of the bill, Packard criticized the current bankruptcy code for failing to protect churches and other charities.

“Under current bankruptcy statutes, debtors can spend their money on alcohol, gambling, and 1-900 psychic advice calls but can’t drop as much as a dime into a collection plate without breaking the law,” he said. “For Americans, tithing is not an option but a requirement of faith. I don’t think we should be telling people they can’t practice their faith because they are having financial problems. It’s absurd and it’s un-American.”