Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

Voluntary ProceedingsSection 109 of the Bankruptcy Code dictates the eligibility requirement for bankruptcy filings.The code initially provides that voluntary bankruptcy filing under Chapter 11 is only availableto ―a person that resides in or has a domicile, a place of business, or property in the UnitedStates, or a municipality…‖ The statute defines ―person‖ to include any ―individual,partnership or corporation.‖ Thus, any nonprofit corporation qualifying under Illinois state lawis eligible to voluntarily file for bankruptcy under Chapter 11 of the Bankruptcy Code.Involuntary ProceedingSection 303 of the Bankruptcy Code provides that an involuntary case may be filed by three ormore creditors (or, if there are fewer than 12 creditors in total, one creditor) holding claims of atleast $15,325 in the aggregate ―against a person, except a farmer, family farmer, or a corporationthat is not a moneyed, business, or commercial corporation.‖ Thus, any corporation that doesnot qualify as ―moneyed, business or commercial corporation‖ cannot be subject to aninvoluntary Chapter 7 or 11 case.An involuntary filing usually requires multiple creditors with significant claims who know ofeach other’s existence and who each believe that causing an involuntary filing – a veryaggressive strategy -- is their best path to recover their owed debts.Thus, involuntary filings are fairly rare and virtually unheard of in the realm of nonprofitentities. This is because it is generally accepted that nonprofit entities are not eligible to beinvoluntary debtors. Churches, school foundations and charitable organization are almostcertainly not eligible. Some courts have struggled with the determination of whether or not anonprofit entity is actually a ―moneyed, business, or commercial corporation,‖ regardless of itsofficial designation. If a court were to take up the task of determining whether the target of aninvoluntary petition is a ―moneyed, business or commercial corporation‖, the court wouldlikely examine the entity’s charter, business activities and the powers and characteristicsimposed on the entity by the laws of the state of its incorporation, such as tax laws.Preparing for a Chapter 11 CaseAn emergency Chapter 11 filing is rarely successful. Most Chapter 11 cases (and virtually everysuccessful Chapter 11 case) begin in negotiations long before they are publicly filed. If acompany is unable to pay its debts as they come due, they should consult appropriateprofessionals to assess the problem, the company’s rights and obligations and the rights andremedies available to the company’s creditors. After such a consultation, a company maydecide Chapter 11 is a realistic option.Once a strategy is developed, the company should approach its key creditors to explain theissues and seek the support of those creditors to the company’s restructuring strategy. It islikely that the company will first be requesting a forbearance from the creditor exercisingremedies (think foreclosure), a waiver of existing defaults, an amendment to the company’scredit documents or possibly all three actions. This initial step will provide the company thetime necessary to prepare for and commence a Chapter 11 filing in order to resolve theircorporate issues.36