Non-profit organizations are businesses, too. They simply don’t have a profit motive or shareholders. And they often make our world a better place by assisting those in need, adding culture to our society and in many other ways. Orchestras are a recent example of organizations that may be non-profit but have seen financial turmoil due to the economic recession. In years past, numerous non-profit religious entities sought bankruptcy relief to deal with claims of sexual abuse. There are certain requirements applicable to all businesses which seek to file bankruptcy, and non-profits are subject to the same requirements.
Non-profits can benefit from the bankruptcy process, either by restructuring debts and continuing to operate, or by providing a method to transfer valuable assets to another entity which can continue to make use of them. However, there is a restriction on the ability of a non-profit entity transferring its property. Section 541(f) of the Bankruptcy Code provides that a non-profit entity can transfer property only to the same extent it could if no bankruptcy had been filed. So, an analysis of legal or donor restrictions on the transfer of property owned by a non-profit is essential to assessing whether bankruptcy is a potential solution.
There are often issues regarding exactly what property a non-profit owns. Funds could be held in trust or be subject to various restrictions. Non-profits in the healthcare arena may own licenses or have contracts with the government or insurance companies that are not freely transferable. In general, filing a bankruptcy does not expand property rights, it simply provides a way to protect and maximize the value of property to benefit creditors.
Just like any other business, analyzing such issues for a non-profit entity is often the most crucial part of any process to extricate the business from financial distress. Our team has been involved with non-profit entities in various business areas and can help assess what options will best serve the needs of a distressed non-profit entity.