The separation of church and state has not prevented the custom of tithing from getting caught up in the debate over bankruptcy reform.

Because of the issue's sensitivity, lenders that were highly vocal on other matters during the recent deliberations of a national reform commission are sitting this one out.

Legal scholars and members of Congress are discussing whether tithing- the traditional religious donation of one-tenth of a person's income-should be sacrosanct even after a declaration of bankruptcy.

Lawmakers are also considering whether churches and charities should be allowed to keep the tithes they received from bankrupt people. Trying to prevent bankrupt people from tithing "is a losing argument that makes the lenders look silly and greedy," said Peter Califano, an attorney in San Francisco who represents lenders in bankruptcy cases.

But the credit-granting establishment soon may feel compelled to take a stand. Congress held hearings on the matter in September, and two bills were proposed in October that would prevent bankruptcy trustees from recouping tithes paid to charities.

Sen. Charles E. Grassley (R-Iowa) introduced the Religious Liberty and Charitable Donation Protection Act of 1997 to protect tithing under the bankruptcy code. Rep. Ron Packard (R-Calif.) introduced companion legislation in the House, with more than 100 supporters from both political parties.

The proposals were sparked by a 1992 court decision that forced Crystal Evangelical Free Church in New Hope, Minn., to return $13,500 it had received from a bankrupt couple who donated 10% of the proceeds from their electrical contracting business.

The church went to court to try to keep the money, spending nearly $300,000 in legal fees. Oral arguments are scheduled for Dec. 8 on the church's appeal to the Eighth Circuit in St. Louis.

Steven T. McFarland, general counsel of the Christian Legal Society, said the outcome of the case-and the fate of the bills in Congress-are of tremendous concern to churches.

"I don't think we want to ask parishioners to submit their financial statements before they put money in the offering plate," he said.

The number of bankruptcy cases involving people who tithe is small but growing, legal experts say. By one estimate there are about 150 pending cases in Utah, where tithing by Mormons is commonplace. At least six other high-profile cases are wending their way through courts in other states, the experts said.

Most of the funds recovered so far have been from small churches, but mainstream churches and charities soon may also be fair game. "The concern is that if they can do it to the small storefront church, they can do it to the larger churches," said Mr. Califano. "And if they can do it to the churches they can do it to any charity, like the Sierra Club, for instance."

Bankruptcy trustees currently can decide whether a debtor may continue to tithe during the bankruptcy process. The trustee also has the right to collect any charitable donations the debtor made in the year before filing.

The Grassley and Packard bills seek to change these practices, protecting the right to donate up to 15% of income as debt obligations are repaid. The charitable donations would be off-limits to creditors.

The legislation's sponsors said they had no precise data on how many charitable organizations have been asked to return contributions, or how many people who tithe file for bankruptcy.

Rep. Packard believes many churches and charities are quick to give in when approached by bankruptcy creditors, particularly since the Minnesota case came to light, said a spokesman for the congressman. Returning a donation is generally cheaper and easier than fighting a legal battle, he added.

Opponents of the legislation say it sends the wrong message by encouraging the bankrupt to "tithe with impunity," said Daniel L. Keating, a professor and associate dean of the law school at Washington University in St. Louis.

"Churches should not begrudge having to give back the money once the facts come to light," Prof. Keating said. "I don't think a church should let its own self-interest get in the way of what's right, or undoing a wrong."

Prof. Keating, who teaches bankruptcy law and describes himself as a tithing Christian, said debtors should not be allowed to give money to charity before repaying their obligations. Changing the law would "give anyone the option to divert money that would otherwise go to repay their creditors," he said.

The National Bankruptcy Conference-a group of bankruptcy lawyers, judges, and academics-has also spoken out against the legislation.

Lenders find that "philosophically, it is a tough issue to take on," said Samuel Gerdano, executive director of the American Bankruptcy Institute, a research and educational group in Alexandria, Va. "And basically, it isn't costing them a lot of money."

The most contentious part of the debate has involved charitable organizations' responsibility in refunding money from bankrupt donors. According to the National Council of Churches, the average Christian gives about $500 a year to a religious organization.

"Where should the risk of loss fall?" said Mr. McFarland of the Christian Legal Society.

Because most people who declare bankruptcy have no assets to repay creditors, he said, "there is a temptation to turn to churches and charities where previously there was a dry well." u

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