Can A Non-Profit File Bankruptcy? Should It?

Non-profit organizations are businesses, too.  They simply don’t have a profit motive or shareholders.  And they often make our world a better place by assisting those in need, adding culture to our society and in many other ways. Orchestras are a recent example of organizations that may be non-profit but have seen financial turmoil due to the economic recession.  In years past, numerous non-profit religious entities sought bankruptcy relief to deal with claims of sexual abuse.  There are certain requirements applicable to all businesses which seek to file bankruptcy, and non-profits are subject to the same requirements.

 Non-profits can benefit from the bankruptcy process, either by restructuring debts and continuing to operate, or by providing a method to transfer valuable assets to another entity which can continue to make use of them.  However, there is a restriction on the ability of a non-profit entity transferring its property.  Section 541(f) of the Bankruptcy Code provides that a non-profit entity can transfer property only to the same extent it could if no bankruptcy had been filed.  So, an analysis of legal or donor restrictions on the transfer of property owned by a non-profit is essential to assessing whether bankruptcy is a potential solution.

There are often issues regarding exactly what property a non-profit owns.  Funds could be held in trust or be subject to various restrictions.  Non-profits in the healthcare arena may own licenses or have contracts with the government or insurance companies that are not freely transferable.  In general, filing a bankruptcy does not expand property rights, it simply provides a way to protect and maximize the value of property to benefit creditors.

Just like any other business, analyzing such issues for a non-profit entity is often the most crucial part of any process to extricate the business from financial distress.  Our team has been involved with non-profit entities in various business areas and can help assess what options will best serve the needs of a distressed non-profit entity.



3 Replies to “Can A Non-Profit File Bankruptcy? Should It?”

  1. First thing is don’t borrow any more money from pay day lederns. I know their industry very well and there is only one thing you can do and that is talk to them. Lenders including pay day lederns are bound by both state credit codes and the uniform credit code this means that they must follow strict guidelines on how they do business and collect money(this falls under govt acts) so don’t assume that they are not answerable to anyone. In NSW there is actually a cap on the amount of interest they can charge you per annum. If you were in this situation when they lent to you then they shouldn’t have (unless you weren’t completely truthful on your application). Sometimes we are victims of circumstance and can get into trouble as you are (you are not alone). They can ask you for money but cannot make unreasonable demands or discuss your debt with anyone other than yourself. They also cannot refuse a payment you attempt to make even if it is not the amount they had hoped for.Make a repayment plan that is very small (so you are making an effort to pay) and explain that you first need to organise accomodation and maybe employment (you didn’t say if you had a job or not). If you feel you are being harassed by them contact the dept of fair trading as there are definate rules as to when you can be contacted , how, and how often they may approach you for funds. DO NOT let yourself be bullied but DO be honest , reliable and don’t committ to a repayment plan that you know you cannot afford as thay are not allowed to force you to accept an unaffordable agreement. If they are trying to direct debit the funds from your account and you have no money you DO have the right to advise them in writing to stop as the funds aren’t available (this will stop your bank account going into debit and causing unecessary fees). If they do not stop take a copy of your letter to your bank and advise them you have requested the lender in wirting not to debit your account. Your bank will then make this stop. Stay in contact with the lender and if you make regular repayments (even if it is a small amount) you will prove that your situation is genuine and your are making every attempt to rectify the situation. In these circumstances you can feel like there is no light at the end of the tunnel but trust me there is. The more you hide from them the harder it will be to solve. Beware of people offering you quick fixes as they will fix quick but leave a bitter taste in your mouth for years to come. It’s not worth it. You are better off trying to pay the money back than trying to avoid them.

  2. Pingback: Yes, Nonprofits Sometimes Do File Bankruptcy - For Purpose Law Group
  3. What happens to employee contracts when a non-profit files Chapter 11? Specifically, in the case of a Hospital — what happens to doctor’s contracts?

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