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Are Charitable Gifts Fraudulent Transfers?

Charitable donations made during the two years before filing bankruptcy may fall within a safe haven of not being fraudulent transfers.

The Quick Answer

To answer the question in the title directly, charitable gifts you make before filing bankruptcy COULD be fraudulent transfers. But they are not if they fit within a significant but limited exception that Congress has carved out for legitimate charities.

A Very Helpful Exception

This is important. Your bankruptcy trustee has the power, under many circumstances, to require someone you gave a gift to within the two years before filing bankruptcy to return the gift, not to you but to the trustee for distribution to your creditors. Imagine a friend, relative, your church, or other charity being ordered to return whatever money or goods you donated! Instead of your good intentions being realized, that money is used to pay the debts you’d hoped to write off.

Our last three blog posts discussed fraudulent transfers, including innocent ones. Generally, giving away something and get nothing, and do so while you’re insolvent (owe more than you own), that’s a fraudulent transfer.  The trustee can force the recipient to return the gift, but not if the gift qualifies for the charitable contributions exception.

The Elements of the Exception

To qualify for this exception the gift must:

  • consist of cash or financial instruments (stocks, bonds, options, and such)
  • be made by a “natural person”
  • be given to a “qualified religious or charitable entity or organization” under certain provisions of the Internal Revenue Code
  • either be not more than 15% of the debtor’s gross annual income during the year of the gift(s), OR, if more than that, “the transfer was consistent with the practices of the debtor in making charitable contributions.”

See Section 548, subsections (a)(2) and (d)(3) and (4) of the Bankruptcy Code.

These elements are mostly self-explanatory but are worthy a bit more explanation.

Cash and Gifts

When you think of donating assets, you may not immediately think of cash contributions. But cash or money in your checking account are certainly assets. They can be the stuff of a fraudulent transfer like any other asset. So cash contributions need to fit this exception to prevent the bankruptcy trustee from going after them.

The Statement of Financial Affairs is one of the main documents you and your bankruptcy lawyer prepare and file. Its question 13 asks: “Within 2 years before you filed for bankruptcy, did you give any gifts with a total value of more than $600 per person?” Its question 14 asks the same about “gifts or contributions” “to any charity?” If you answer “yes” to either one you need to provide details like the recipient’s or charity’s name and address, what and when you gave, and the value. So, cash and gifts are fully covered.

Natural Persons

This charitable contributions exception only applies to people, not to corporations or other business entities.

However, if you own a sole proprietorship that is not a separate legal entity and can’t file its own bankruptcy. Your business and personal debts and assets are all together, not legally distinct. So, the business’ charitable contributions are effectively contributions by you, a qualifying natural person.

Qualified Religious or Charitable Organization

Money given to help support a friend or a relative, one to whom you owe no legal obligation of support, does not qualify.

Nevertheless, frankly, practicalities may very well prevent a trustee from bothering to pursue such a friend or relative. The person may be very difficult to collect from if the money is gone and he or she is insolvent. A trustee has to seriously consider what it would cost to collect the money and the risk of never collecting. Often the money is not worth pursuing.

15% or “Consistent with the Practices of the Debtor”

Relatively few people in financial trouble have been lately donating anywhere close to 15% of their gross annual income to charity.  And even in the rare circumstances when they do donate more, those donations still qualify if making such donations reflected the debtor’s charitable giving practices.  Except in very unusual circumstances would this element disqualify any charitable donations from the exception.


Most payments in cash and financial instruments to genuine charitable organizations will not be fraudulent transfers. However, if you’ve made any significant charitable contributions in the last two years, review them carefully with your bankruptcy lawyer. Given the very awkward consequences if they don’t qualify for the exception, you want to make sure.


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