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his actions. Nevertheless, the possibility of personal liability should present
individuals with a powerful incentive to avoid administrative dissolution.

CHAPTER 80. Bankruptcy

A thorough discussion of the bankruptcy process is beyond the scope of this
Handbook. Instead, this Chapter highlights some of the issues specific to
nonprofits in the bankruptcy process. A nonprofit considering bankruptcy will
almost certainly need to seek legal assistance before filing a bankruptcy petition. It
can be a complicated procedure, and once a petition has been filed, there are
restrictions placed on a debtor. For example, payment of attorneys’ fees and
nonroutine business transactions all require the consent of the court after a
Chapter 11 petition is filed. Moreover, at least one commentator has warned that
an entity in reorganization may no longer be tax-exempt when it comes out of the
process. Evelyn Brody, The Charity in Bankruptcy and Ghosts of Donors Past, Present,
and Future, 29 Seton Hall Legis. J. 471 (2005). Finally, if the goal of the directors is

reorganization under the bankruptcy code, the board should consider how a
bankruptcy filing will impact donors. Will they rally in support or will they give their
money elsewhere?

Although for-profit corporations can be made the subject of involuntary
bankruptcy proceedings, creditors of nonprofit corporations cannot force these
into involuntary proceedings. However, a nonprofit may file for voluntary
bankruptcy under either Chapter 7 or Chapter 11 of the bankruptcy code.
Chapter 7 is titled Liquidation. As the name implies, the assets of the debtor are
gathered and distributed to pay creditors. In a Chapter 7 proceeding, the
organization is controlled by an independent bankruptcy trustee who will generally
not be knowledgeable of the organization’s business and will do nothing but sell off

the assets and make distributions to creditors. Chapter 11 is titled Reorganization.
Chapter 11 is a mechanism by which a financially distressed organization may be
able to emerge financially viable once more. Under Chapter 11, the debtor
normally becomes a debtor in possession and can continue operating in its normal
course of business under its existing management. A debtor in possession is also
allowed to develop its plan of reorganization, the plan describing how creditors are
to be paid. However, Chapter 11 is a difficult, time-consuming, and expensive
process and there are very few examples of Chapter 11 reorganizations of
nonprofits.

Once a petition is filed, an automatic stay is imposed. The stay prevents
creditors from taking any actions to enforce pre-petition liens. The stay does not

WASHINGTON NONPROFIT HANDBOOK -293- 2018