June 27, 2017

Chapter 11 Bankruptcy and Religious Institutions

picture of a church steepleChapter 11 bankruptcy may offer a long term solution to the problems churches now face in the wake of The Great Recession.

While the recession has been painful for millions of individuals and hundreds of thousands businesses, it has also made continued existence a matter of concern for a number of churches and other religious institutions.

Unfortunately, the leadership of many religious institutions are fighting an uphill fight without knowing their options in bankruptcy court.

Chapter 11 for non-profit institutions

The reason that many leaders of religious organizations do not think of reorganization under Chapter 11 of the United States Bankruptcy Code is the misperception that only businesses can file Chapter 11.  This simply is not true.

Chapter 11 bankruptcy is available for non-profit institutions.  Pamela Foohey, a law professor at the University of Illinois College of Law, has identified approximately 500 religious organizations that filed Chapter 11 during the years 2006 through 2011.

Indeed, I filed and successfully consummated a Chapter 11 reorganization for a rather large well known church in Charlotte within the last several years.

Three reasons churches need Chapter 11 bankruptcy protection

The reasons that religious organizations have financial problems generally fall into three categories.  The first is falling income.  Contributions are dependent on jobs, and the Great Recession has left many unemployed or underemployed.

The second is overspending on staff.

The third is overspending for buildings and other hard assets such as buses. Increasing contributions is something that Chapter 11 bankruptcy cannot do.  However, it does bring home the reality of the financial problem which can help.

Overspending on staff will definitely be effected by Chapter 11.  The Court will approve reasonable payment to employees; however, it will not approve of inflated salaries or “love gifts.”

Last, Chapter 11 can provide a very effective vehicle for dealing with secured lenders.  This is particularly true of church buildings that hold great meaning for the congregants and serve as the core of the community.  The reason for this is that church buildings have limited use, thus limiting the value on foreclosure.  As a result, lenders tend to be very flexible in dealing with Chapter 11 reorganizations.

If you are associated with a religious organization that is having financial problems, consult a qualified bankruptcy attorney

Learn about the options.  You might find that Chapter 11 is just what your organization needs.