Magazine article Business Credit

Honor Thy Creditors? the Religious Debtor's Constitutional Conflict with Section 1325 (B)

Magazine article Business Credit

Honor Thy Creditors? the Religious Debtor's Constitutional Conflict with Section 1325 (B)

Article excerpt

American bankruptcy law attempts to accommodate two conflicting goals. On the one hand, it strives to provide the debtor with a "fresh start" that will free him of his financial obligations to creditors after a specific time (an idea that was put forth almost 60 years ago by the Supreme Court. The Court, in Local Loan Co., v. Hunt, 292 U.S. 234, 1934, noted that a purpose of the Bankruptcy Act is to "relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh ...") Conversely, it aims to provide creditors with a fair and efficient system for the collection and distribution of the debtor's assets. While these two divergent interests are bound to clash during any bankruptcy proceeding, no conflict can be any greater than one involving a potential constitutional violation. It is this type of conflict that is almost assured to arise when a debtor who contributes money to his church proposes a plan of reorganization under Chapter 13 of the 1978 Bankruptcy Code(Code).

The arguments on both sides of this problem center around two clauses of the First Amendment of the United States Constitution--the Free Exercise and Establishment Clauses. The debtor's argument is that a court's refusal to allow religious tithing (in this article, tithe is defined as money contributed for religious purposes, technically defined as one-tenth of one's income) in a Chapter 13 plan violates the debtor's right to the free exercise of religion. The creditor's counter argument is that if a court allows a debtor to contribute to a religious organization under a Chapter 13 plan, the court is forcing the general unsecured creditors to contribute to the debtor's religious organization, thereby violating the Establishment Clause.

The Language of Section 1325(b)

In a Chapter 13 bankruptcy proceeding, the debtor proposes a plan whereby he retains assets in exchange for making payments to his creditors from his future earnings over a period of three to five years. Section 1325 of the Code provides the requirements for confirming a Chapter 13 plan and lists conditions that such a plan must meet in order to be confirmed by the court. Despite the meeting of these conditions, the trustee or an unsecured creditor may object to confirmation of the plan under subsection (b).

If there is an objection to the plan, the court may not confirm it unless,

1. the plan proposes to pay the objecting creditor in full, or

2. the plan provides that all of the debtor's disposable income during a three-year period will be applied toward his payments under the plan.

"Disposable income" can be loosely defined as the amount of income that the debtor uses to pay creditors. (One of the problems with the disposable income test is that the Code's definition is vague.) In order to arrive at an amount that represents the debtor's disposable income, the court generally uses a two-step process. First, the court determines the debtor's projected income for the payment period, including salaries, pay raises, and spouse's income. Next, the court evaluates the debtor's living expenses to decide which of these expenses are "reasonably necessary" to support the debtor or a dependent of the debtor. Because Section 1325(b) contains general language, the court is forced to use its own discretion in predicting income and determining what expenses are reasonably necessary to support the debtor.

It is at this point that a constitutional problem arises for a debtor who tithes to a church. If the court decides that the tithe is a reasonably necessary expense, and as such should be excluded from his disposable income, the debtor's creditors may claim that this decision violates the Establishment Clause. And, if the court determines that the tithe is not a reasonably necessary expense and allows it to be included in the disposable income available to creditors, the debtor may argue that his right to freedom of religion has been impeded. …

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