Can a Non-Profit File for Bankruptcy?
A headline out of Wisconsin caught our attention recently. A nonprofit, UNISON, filed for Chapter 7 bankruptcy protection earlier this month. UNISON ran senior centers and worked with young families in the Milwaukee area but ran into financial problems after the CEO embezzled funds from the corporation. The non-profit reported that it had between $500,000 and $1 million in debt but assets only in the $100,000-500,000 neighborhood.
This case brings to light a little-known fact in the philanthropic community—non-profits sometimes file for bankruptcy and should file for bankruptcy when their financial position declines.
However, nonprofits filing for bankruptcy remain rare. A study from a decade ago found that non-profits made up only 1% of all corporate bankruptcies even though non-profits comprised 30% of all corporations.
Considerations for Non-Profits in Financial Difficulty
It is never an easy decision to file for bankruptcy. Corporations should carefully consider all relevant factors and seek out legal guidance as well.
Many of the considerations are the same that for-profit corporations should consider. First, if you file for bankruptcy, will you be able to appreciably reduce the amount of debt that you are servicing? Not all debts can be discharged in a bankruptcy. For example, you might have secured debt or certain tax liabilities that are very hard to eliminate. If you can’t reduce the costs of servicing debt in any meaningful way, then bankruptcy will not help your non-profit turn a corner.
You also should consider why you fell in financial difficulty. Was there a temporary downturn in finances? For example, donors might stop giving to charities when the economy enters a recession. When the economy improves, however, you can reasonably expect donors to resume giving.
In other cases, the downturn could be permanent. For example, the government might permanently have eliminated certain grants that you received. If they make up a substantial portion of your operating budget, then it makes little sense to try and save the non-profit.
Choosing the Right Bankruptcy
If you want to continue the non-profit, then you will likely file for Chapter 11. This is a complicated bankruptcy that gives creditors substantial input as to which debts should be paid and which ones will be discharged. The debtor also needs to maintain a level of transparency as it operates the non-profit corporation for the duration of the bankruptcy proceedings.
Another option is Chapter 7, which you might choose if you do not intend to continue the non-profit corporation. A Chapter 7 allows a non-profit to wipe out many types of debts. However, a Chapter 7 can have its own complications, especially if the non-profit owns assets, like real estate.
Nowack & Olson Has Represented South Florida for Decades
As a leading bankruptcy law firm, we routinely meet with individuals and small businesses that are in financial distress. Our experience allows us to carefully analyze each person’s debts and identify what option will help them secure their financial future.
To start the process, please contact one of our Plantation small business bankruptcy attorneys by calling 888-813-4737. We offer a confidential initial consultation which is free.