A Chapter 13 bankruptcy requires the commitment of all the debtor’s disposable income to their unsecured creditors. Disposable income is calculated by taking the debtor’s gross income, subtracting all payments “reasonably necessary” for the care and support of the debtor and their dependents. If there is any money left, it is considered disposable income that must be paid to their creditors each month.
Often times people want to know if they can keep paying into their 401k retirement or 529 college fund for their child. Many also want to know if they can still give tithe to their religious institution. Fortunately for those filing bankruptcy, the answer to each of these is almost always, “Yes.”
Again, all things reasonably necessary for the maintenance or support of the debtor and their dependents can be paid for through their bankruptcy plan. Since a 401k is used to take care of themselves in old age, contributing to it is reasonably necessary. The 529 college savings plan is reasonably necessary for the support of their child and tithe, interestingly, is reasonably necessary for the spiritual well being of the debtor.
Although tithe technically means 10%, the bankruptcy code allows for up to 15% of your gross income to be donated to charities. That means that if you make $60,000 per year, you can give up to $750 a month to your church in lieu of paying it toward creditors in your Chapter 13 repayment plan. While this is not all that advantageous economically, it does help debtors have more control over where their funds are go. Any charity can be the beneficiary of this money, not just churches, but it is best if the debtor has a history of making such contributions prior to filing the case, otherwise the transfers might look fraudulent.
The 15% contributions are outlined by the IRS standards, which only apply when the debtor makes more than the median income. This means that it may be considered unreasonable for a debtor who makes $15,000 to give away $187.50 per month to a church or other charity. This makes sense because it is extremely difficult to survive at such a lot income level, leading to more borrowing of money which should be repaid instead of given away.
If you have questions about how charity and bankruptcy work together, contact a Jacksonville Bankruptcy Lawyer or call us at (904) 685-1200 for a free consultation.