Preference to Charity or Creditors in Bankruptcy?

In "In Re: James A. Smihula, et ux.," a United States Bankruptcy Court dismissed an attempt to convert a Chapter 13 bankruptcy into a Chapter 7 bankruptcy on the basis of a post-petition desire to give to charity.

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In Re: James A. Smihula and Jean M. Smihula

PGDC SUMMARY:

James and Jean Smihula ("Debtors") filed a petition under Chapter 13 (reorganization of debts) with an original repayment plan of approximately $865 per month. Subsequently, the Debtors filed a notice of voluntary conversion to Chapter 7 (discharge of debts) with a Motion to Amend Schedules I & J, the significant change being the inclusion of a monthly charitable contribution of $700 per month, up from $0 per month. The Debtors admitted that their decision to make charitable contributions was made after the Chapter 13 filing and that they preferred to use their disposable income for charitable purposes rather than paying their creditors. The trustee brought a motion to dismiss the Debtors' Chapter 7 case on the basis that granting the requested discharge would amount to substantial abuse under 11 U.S.C. section 707(b).

The United States Bankruptcy Court for the District of Rhode Island ("Court"), quoting section 707(b) as amended by The Religious Liberty and Charitable Donation Protection Act of 1998, stated that it "cannot consider whether a debtor "has made or continues to make" charitable contributions, when determining substantial abuse," and that this language "requires that as of the petition date the debtor had established a history of charitable giving." Additionally, the Court stated that the legislative history of the amendment makes it clear that its proponents did not intend "to allow debtors to begin making charitable contributions on the eve of bankruptcy." Accordingly, the Court granted the trustee's motion to Dismiss the conversion of the Chapter 13 into a Chapter 7, stating that granting the Debtors the requested relief "would amount to substantial abuse, and would constitute a perversion of the amended statute."

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