National Center for Charitable Statistics

The Nonprofit FAQ

Can a nonprofit declare bankruptcy?
Jocelyn DeVance Taliaferro, MSW, PhD, from North Carolina State University, wrote to ARNOVA-L (see http://www.arnova.org) on 11/1/07 to ask:

Could anyone direct me to both literature and practical advice about a nonprofit filing for bankruptcy? Does anyone know of any organizations that have done it? What were the ramifications? When I asked a nonprofit lawyer, he offered that nonprofits "most often simply close and open as something else." Is that true? I am not as much interested in case studies of organizations that got to the point of bankruptcy, as I am in the process of filing and what happened after the filing. Any assistance would be greatly appreciated.

Nigel Allen wrote from Toronto, Canada:

For a discussion of voluntary bankruptcy filings by Roman Catholic dioceses faced with lawsuits about clergy sex abuse and how the dioceses sought to shield certain assets (local churches and schools) by claiming they were held in trust, see http://findarticles.com/p/articles/mi_m0ITW/is_6_89/ai_n19039309

The directors of a charity which files for bankruptcy may find themselves personally liable for certain debts, such as payroll deductions for taxes which were not remitted to the government.

The possibility that board members and staff may be personally liable for payroll taxes is highlighted in a discussion of the increase in bankruptcies at a time of economic downturn on Jack Siegel's "Charity Governance" blog. See http://www.charitygovernance.com/charity_governance/2009/02/strom-sends-a-warning-to-readers-pay-the-payroll-taxes-first.html">this entry.

Woods Bowman of DePaul University in Chicago added:

I have experience with a nonprofit that went through Chapter 11 and I have written on the subject: "Chapter 11 for Nonprofit Organizations," in 1999 Wiley Bankruptcy Law Update, Keith Shapiro and Nancy Peterman, eds. (New York: John Wiley, 1999) pp. 523-528.

This topic can get quite technical very fast; for the record there is a difference between liquidation (Chapter 7, what your lawyer is talking about) and reorganization (Chapter 11). The latter offers a way of saving an organization. It's always been a bit of a mystery to me that more organizations have just closed up without trying to reorganize and save themselves.

Theron Fuller of the U.S. Army Information Management Support Center provided these links a day or so later:

Unclear bankruptcy rules challenge Catholics and Disciples Christian Century, August 10, 2004 by Jeff Kosseff. The nonprofit status of the Catholic Archdiocese of Portland, Oregon, which filed for bankruptcy last month, and the Protestant-affiliated National Benevolent Association, which fled for protection in February, may help determine legal precedents for church bodies that say they are unable to meet their financial obligations. http://findarticles.com/p/articles/mi_m1058/is_16_121/ai_n6159319

Community nonprofit files for bankruptcy in wake of lawsuit Houston Business Journal - by Jennifer Dawson, Houston Business Journal. http://www.bizjournals.com/houston/stories/2002/11/11/story7.html

Charity Governance: NEW BANKRUPTCY LAW HAS IMPLICATIONS FOR NON-PROFIT BOARDS http://www.charitygovernance.com/charity_governance/2005/03/new_bankruptcy_.html

Charity Governance: CATHOLIC DIOCESE OF TUCSON FILES PLAN OF BANKRUPTCY REORGANIZATION
http://www.charitygovernance.com/charity_governance/2004/09/catholic_dioces.html

Assessing Financial Vulnerability in the Nonprofit Sector
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=647662

Google Book Excerpt: Guidebook for Directors of Nonprofit Corporations By George W. Overton, Jeannie Carmedelle Frey
http://books.google.com/books?id=uwfc4Pg8J2sC&pg=PA177&lpg=PA177&dq=nonprofit+bankruptcy&source=web&ots=3ShAYwREf6&sig=lLwLZy-Z3dho4LpFbwFgz2PMjWM

Hospital Conversions Nonprofit hospitals across the country are increasingly struggling, due to a number of factors. When nonprofit hospitals, like any other business, face severe financial hurdles there are not many options. They can reorganize, "tighten their belts," and become more efficient. But if these endeavors fail, the hospital can spiral into a cycle of decreasing revenues and mounting debt. In that situation, many nonprofit hospitals under stress turn to the option of "conversion."
http://www.consumersunion.org/conv/hospitalconversions.html

Google Book Excerpt: Understanding Nonprofit Organizations: Governance, Leadership, and Management By J. Steven Ott http://books.google.com/books?id=_dBNeMFhNrMC&pg=PA177&lpg=PA177&dq=%22nonprofit+organization%22+bankruptcy&source=web&ots=FMt1b5vV9T&sig=KBUcWyAIBebVLcGlmfPQcDIqihw

Blog: Debt Management for a Nonprofit Organization http://www.associatedcontent.com/article/213222/debt_management_for_a_nonprofit_organization.html

Unpaid president of nonprofit organization was not responsible person. Publication Date: 01-MAY-03 Publication Title: The Tax Adviser http://goliath.ecnext.com/coms2/summary_0199-935519_ITM

Guide to Dissolution of Illinois Not For Profit Corporations -- What is Dissolution? http://www.illinoisprobono.org/index.cfm?fuseaction=home.dsp_content&contentID=1538

PROTECTING A NONPROFIT ORGANIZATION'S OFFICERS, DIRECTORS AND MANAGERS Harrison & Moberly, LLP, Indianapolis by David Williams Russell http://www.imakenews.com/iln/e_article000722728.cfm?x=b11,0,w

Google Book Excerpt: The Nonprofit Sector: A Research Handbook By Walter W. Powell, Richard Steinberg http://books.google.com/books?id=7n8dPi2ew9YC&pg=PA256&lpg=PA256&dq=%22nonprofit+organization%22+bankruptcy&source=web&ots=1xqShmq0YI&sig=5itDmJmNI7yvREl5JUZv0_WDae4

Google Book Excerpt: Problems in Health Care Law By Robert Desle Miller
http://books.google.com/books?id=9Jyggn6MtR4C&pg=PA87&lpg=PA87&dq=%22nonprofit+organization%22+bankruptcy&source=web&ots=68LAexz6O2&sig=jc5SLv86qQIO5Nyd69xl_MR3WDo

Rescue and Recovery. CEO's tough business tactics save a failing health-care charity http://www.philanthropy.com/free/articles/v18/i14/14003501.htm

Google Book Excerpt: Social Capital And Welfare Reform: Organizations, Congregations, and Communities By Jo Anne Schneider
http://books.google.com/books?id=Uz0pWOCT1EUC&pg=PA83&lpg=PA83&dq=%22nonprofit+organization%22+bankruptcy&source=web&ots=ieRudSHIur&sig=VhahTHTcwgXWuXN50hO0U-8Url0

The Sarbanes-Oxley Act and Implications for Nonprofit Organizations http://www.guidestar.org/DisplayArticle.do?articleId=883

Bankruptcy filing called option for archdiocese. Advisers cite worst-case plan By Stephen Kurkjian and Michael Rezendes, Globe Staff, 8/2/2002. The Archdiocese of Boston is considering the option of filing for bankruptcy if it loses large judgments in clergy sexual abuse cases, including the dispute currently being heard in Suffolk Superior Court over whether it must abide by an agreement to pay alleged victims of convicted child molester and former priest John J. Geoghan between $15 million and $30 million, church advisers said.
http://www.boston.com/globe/spotlight/abuse/stories2/080202_bankruptcy.htm

Project Homestead Inc. has filed for Chapter 7 bankruptcy protection, just weeks after an audit by the city of Greensboro raised questions about how the nonprofit organization allocated more than $17 million in city grants it had received since the early 1990s.
http://www.bizjournals.com/triad/stories/2004/01/26/daily44.html

United States Code - TITLE 42 - THE PUBLIC HEALTH AND WELFARE
CHAPTER 139 - VOLUNTEER PROTECTION. U.S. Code as of: 01/19/04
Section 14503. Limitation on liability for volunteers
http://caselaw.lp.findlaw.com/casecode/uscodes/42/chapters/139/sections/section_14503.html

Bankruptcy for diocese. Filing to stop sex abuse suits won't close schools http://www.spokesmanreview.com/sections/diocese/?ID=37129

LexisONE - Legal Web Site Directory - Bankruptcy Law > Practice Resources http://www.lexisone.com/legalresearch/legalguide/practice_areas/bankruptcy_law_pr.htm

Google Book Excerpt: Financing Nonprofits: Putting Theory Into Practice By Dennis R. Young. http://books.google.com/books?id=Bi1QKmL4k1MC&pg=PA254&lpg=PA254&dq=%22nonprofit+organization%22+bankruptcy&source=web&ots=1Oc4KzF4cY&sig=brH_nCWvHuLugA_FzkqQYDZAAL4

Influence Of The Sarbanes-Oxley Act On Governance Of Nonprofit
Organizations http://www.metrocorpcounsel.com/current.php?artType=view&EntryNo=1605

Posted 11/6/07; reference to the Jack Siegel blog added 2/26/09 -- PB