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

Chapter 4 – Alternatives to BankruptcyAuthored by: Michael Mosher, Avery S. Buffa and Alex Campbell, Mosher & Associates LLCAs explained in Chapter 1 of this Guide, a nonprofit experiencing financial distress has to makeseveral difficult decisions, including whether or not filing for protection under the United StatesBankruptcy Code (the ―Code‖) makes financial and practical sense. Before addressing specificoptions, it is worth emphasizing the importance of obtaining and maintaining an accurate, upto-datelist of creditors. The nonprofit should also maintain a comprehensive balance sheetlisting all of its assets and liabilities, including less obvious intangible assets such as intellectualproperty as well as depreciated fixed assets such as office equipment. The services of anaccountant, either in-house or out, may be necessary. It is important for nonprofits to have afirm handle on their assets and liabilities and a complete list of their creditors because suchinformation is essential to a determination of whether it is ―balance sheet insolvent,‖ meaningthat its liabilities exceed its assets, and/or ―cash flow insolvent,‖ meaning that it cannot pay itsdebts when they come due. A nonprofit experiencing cash flow insolvency can also be said tobe experiencing a ―liquidity‖ problem, meaning that the nonprofit’s revenues are insufficient topay debts when they come due and, while it may have valuable assets, such assets cannot beeasily converted to cash. Often, problems of liquidity and cash flow are temporary. Balancesheet insolvency, on the other hand, is more long-term.For purposes of this discussion on alternatives to bankruptcy, it is assumed the nonprofit hasalready considered the possibility of trying to get out of its financial hole by cutting costs,eliminating programs, and other similar methods. It is also assumed that the nonprofit hasconsidered reorganization under Chapter 11 of the Code but has determined thatreorganization is not a viable option. Finally, it is assumed that the nonprofit does not wish tovoluntarily pursue liquidation under Chapter 7 of the Code.Negotiating Settlement of Debts and/or Workouts with CreditorsSimply being a nonprofit does not generally render an organization immune from collectionactivity by its creditors, which can range from friendly requests for payment to decidedlyunfriendly litigation. It may be tempting for a distressed nonprofit’s officers and directors to tryto pay as many bills as possible and, once the bank account is empty, to simply ceaseoperations. The officers and directors should not give in to this temptation. While this optionmay seem like an easy way out, it could actually create personal liability for the officers anddirectors. This will not only be a headache but could result in substantial risk to an individual’sbank accounts, home, and other personal assets. Illinois and federal law set forth the properprocedures that must be followed in this situation. Generally, if the officers and directorsfollow those procedures, they will likely be able to avoid personal liability. With this in mind,we turn to the first alternative available to the nonprofit experiencing cash flow issues; that is,the negotiation of settlements and workouts.A nonprofit experiencing cash flow problems should be aware that many creditors are willingto negotiate with nonprofit debtors, perhaps more so than with the typical for-profit entity.While an insolvent nonprofit should not assume that its creditors will ―cut it a break‖ simplybecause of its charitable works, the fact is that many creditors will be members of thecommunity served by the nonprofit and will possibly be more lenient as a result. Accordingly,62