Charitable Contributions and Bankruptcy

Many of my clients are extremely generous people. They manage to help their children, other family members, friends, and even strangers despite their own financial problem. Some have possibly exacerbated their financial situation by being too generous. But, generosity towards others should never be seen as a fault. The Bankruptcy Code recognizes this and provides some room for filers to maintain regular charitable contributions.

The Bankruptcy petition anticipates the possibility of charitable contributions. The Statement of Financial Affairs, part 14, asks if the debtor, within the past two years has, "give(n) any gifts or contributions with a total value of more than $600 to any charity." Any such large contribution must be disclosed to the Court. Frankly, contributions this large are rare in the bankruptcy context, as most people facing financial difficulties are not able to make such contributions. However, even if a large contribution was made, it should be deemed acceptable unless the Court has reason to believe it was made to hide assets. So, it should always be disclosed to your attorney so he or she can determine if it will be an issue.

Schedule J of the Bankruptcy petition, which is a list of monthly expenses for the debtor, asks in part 14 for "charitable contributions and religious donations". This should be used to disclose regular, ongoing contributions, such as weekly contributions to a church. Even tithing, the practice of giving 10% of your income to your church, should be permissible. However, in that case, or with any larger charitable contributions, you should be prepared to show that these contributions have actually occurred (in reality, not just in your heart), and have occurred regularly in the past, not just in the weeks leading up to filing bankruptcy. Once again, contributions must be regular, and not seen as an attempt to hide assets that could be used to pay your creditor.

The Chapter 13 means test also asks about charitable contributions, and allows for charitable contributions to be deducted from "disposable monthly income". This disposable monthly income determines how much money must be paid to unsecure creditors such as credit cards and medical bills. You may deduct regular contributions made to "qualified religious or charitable entities or organizations."

So, payments made to pay your lazy cousin's rent does not count as charity. Payments , to your church, or an organization such as The United Way will qualify, once again, assuming they are regular. Payments made to political candidates or campaigns may not be deducted, an important distinction in an election year (given the state of the current election, it sure FEELS like charity).

A final point to make is that charitable contributions must be in the form or money. Contributions of clothes or goods cannot be made from your disposable monthly income. Keep clear records of your charitable contributions and be ready to present them to your attorney.

Ongoing, regular charitable contributions should not prevent you from filing for bankruptcy, and assuming they have been regular in the months leading up to filing, they could even reduce the amount you must pay. Contact us if you want to discuss your situation. There are certain limits to charitable contributions the Court may not allow, you should discuss yours with an experienced bankruptcy attorney.

Calculating Your "Income" For Bankruptcy Purposes

The definition of "income" is pretty straightforward in most contexts. It's generally somewhere along the lines of, "the money I make at work" or the money received from regular benefits such as Social Security or a pension. It seems simple enough.

However, things get a bit more confusing in the bankruptcy context, as they normally do. Income is important in bankruptcy because it determines whether you can file a Chapter 7 bankruptcy, or whether you must file a Chapter 13 bankruptcy (and if so, how much you must pay). The bankruptcy "means test" looks back at the six months before filing to determine your income during that period. So, you just need to look at your paystubs or benefit statements, right?

Nope... not that simple. "Income" as determined by the bankruptcy means test has a very broad definition. Yes, you will need to look at your traditional income, and your paystubs are a good start. But, "income" also includes one time payments, commissions, and bonuses. Income includes household contributions from friends or family members (something few people would think of as "income"). It includes lottery and gambling winnings. It also includes rent, dividends, interest, and royalties, or one time distributions. Most confusingly, it can include alimony or child support (which is normally not taxable), or even inheritances! The definition is so broad it occasionally precludes people in great need of debt relief from filing.

Another confusing aspect of this look back period is that the money is considered earned when it goes into your bank account, not when you actually do the work. So, if you perform a service in December, but are not paid the commission until the next April,  it would be considered "income" in the look back period from August (for which April is in the six month look-back period). The means test can be counter-intuitive, so it is very important your attorney explains it and carefully reviews all income. If in doubt as to whether something is income, tell your attorney!

There are a few exceptions to what is considered income that can work to your favor. Social Security payments are not considered income. Loans are also not income, and neither is your tax refund. But, once again, assume any money coming into your possession in the last six months to be income. An experienced bankruptcy attorney will not lead you astray.

So, what can be done if a one time bonus or windfall is included in your look back period, preventing you from filing Chapter 7 bankruptcy, or artificially distorting your Chapter 13 payment? Wait! No... I don't mean wait for my answer. I mean wait to file!

Proper bankruptcy planning is an important part of my job. Sometimes it is necessary to wait before filing. If you wait a few months, these distorting payments will no longer be part of your look-back period. It's just good planning.

On the other end of the spectrum, sometimes you need to hurry up! If you know that you will soon receive a large bonus at work, you will want to file before it becomes your "income". Remember, it's not when you do the work, it is when you receive the payment. You can use that distinction to your advantage.

Contact us if you want to discuss whether or not your income (or your "bankruptcy income") prevents you from filing. I'd be happy to walk you through this sometimes confusing world!

Some Common Questions About the Meeting of Creditors

What do I need to bring?

You will always need to bring your Social Security card and a valid, government-issued photo ID. If you can't find your Social Security card, you can bring an original W2, but not a copy. The Trustee will not hold your meeting without these, so don't forget!

Where are the Meeting of Creditors held?

For Chapter 7 cases in Allegheny County, the meeting will be held on the 7th floor of the Liberty Center in downtown Pittsburgh. 1001 Liberty Avenue, Pittsburgh, PA 15222. For Chapter 7 cases outside Allegheny County, the locations differ. Make sure to verify with your attorney before the meeting.

Chapter 13 Meeting of Creditors are held downtown in the US Steel Building, 32nd floor. 600 Grant St., Pittsburgh, PA 15219.

What should I wear?

There are no formal requirements, but you should at least dress in business casual. No Steelers jerseys!

Am I going in front of a judge? Is this in a court room?

Nope, you will go in front of a trustee, who is an attorney who reviews your case and asks you some simple questions about your filing. The meeting is held in a conference room, not a court room. Don't imagine this as a courtroom drama right out of a television show. It is a simple, straightforward affair.

Will my creditors be there to ask me questions?

Very rarely. The trustee sits in their place. It is rarely worth the creditors effort to attend, as there is very little they can do if your case is properly filed. If they do show up in a Chapter 13, it is usually to make sure there claim is being allowed (claims are what the creditors say you owe).

I will review the questions asked by the trustee several days before the Meeting of Creditors. While this meeting is fairly informal and should not cause anxiety, it is a hearing held under oath. I always tell my clients, as long as you tell the truth and don't hide anything from the trustee, there is nothing to worry about! The meeting is mostly a review of what you have already confirmed and filed, so there shouldn't be any surprises as long as you have been thorough.

Contact us if you have any questions about your Meeting of Creditors.

Can I Keep a Credit Card in Bankruptcy?

A common question asked by my bankruptcy clients before filing is, "can I not include one of my credit cards in my bankruptcy and keep it?" The reasons differ. Most people want to keep a card in case of an emergency, or at least for convenience. Some want to keep it for travel. Sometimes, the reason is pure nostalgia. "I've had it since I was a teenager!"

Unfortunately, regardless of the reason, the answer is always "no." Credit cards may never be retained in a consumer bankruptcy. The reason is that creditors of the same class must always be treated the same. If you pay back one credit card, you must pay them all back. If you keep one, you must keep them all. Otherwise, the credit cards not being repaid through your bankruptcy will object to your filing, basically asking, "hey, if they are getting paid, why aren't we?"

Closing out all of your credit cards isn't a big deal in Chapter 7 bankruptcy. You will be able to apply for credit cards several months after filing when your case is discharged. Whether or not you want to may be another issue. Many of my clients profess they never want to use another credit card, and while I encourage them to eventually get one to rebuild their credit, I can understand the sentiment. But, in any case, you will be able to access new credit before very long.

The issue is a bit trickier in a Chapter 13 bankruptcy. These bankruptcies last 3 to 5 years, and you are not permitted to use credit cards during this time. All of your credit cards will be closed. This makes planning and savings important in a Chapter 13 bankruptcy. You will need to maintain savings in case of emergency, as you will not be able to access quick credit. Debit cards will need to be used primarily for convenience (most people don't want to carry around large amounts of cash or trying to pay with checks). The advantages of Chapter 13 bankruptcy far outweigh this inconvenience, but it is something worth planning for and considering.

Not having a credit card for awhile can be an inconvenience in a modern economy, but given the advantages offered by filing bankruptcy, it should be seen as a temporary disruption for the greater good.

Contact us if you are facing large credit card debts. While you can't keep them, it is more important to remember that you can make them go away!

Does Bankruptcy Affect My Utilities?

Debts owed to utilities are dischargeable through bankruptcy. This is good news for anyone facing large, past-due bills for gas, electric, cable, or cell phones. However, many of my clients considering bankruptcy are concerned that including a utility in the bankruptcy will result in the service being denied in the future.

Fortunately, the bankruptcy code prohibits a utility from denying service to bankruptcy filers. Not that they would probably even want to... most bankruptcy filers get current and stay current after filing. The utilities would be denying good customers.

However, the bankruptcy code does allow utilities to require a security deposit after filing. Most utilities in western Pennsylvania do not bother with this requirement. The lone exception is Duquesne Light. Duquesne Light will normally close out your account when a bankruptcy is filed, whether or not you have a past-due account. They will require a security deposit (sometimes rather large) for service to continue. I let my clients know beforehand so they can plan accordingly. Once again, no other utilities in western Pennsylvania require this at this time.

If you are current with your cable, cell phone, gas, or water, you can continue making payments as normal, and your service will not be affected. If you are facing a shutoff, the bankruptcy automatic stay will stop the shutoff, so sometimes it is important to act quickly.

It is always worth checking before filing a bankruptcy to see if you have older bills, especially with cell phone or cable companies. Old cell phones bills from college or earlier sometimes linger. Cable bills and expenses are sometimes forgotten after several moves, as it is easy to forget to end the service or return equipment.

Contact us to discuss your options if you have issues with old utility bills or you are facing a shutoff.