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Can A Nonprofit File For Bankruptcy

Why Businesses Rarely File For Chapter 7 Bankruptcy

How to File Bankruptcy for Free with Upsolve

In the vast majority of cases, filing a Chapter 7 bankruptcy will close the business because there’s no way to protect property owned by a separate legal entity like a corporation, or limited liability company . The trustee simply sells the business assets, pays its creditors, and shuts the business down.

But that’s not the only reason why Chapter 7 bankruptcy isn’t regularly used to close businesses. Here are a few additional problems that can crop up:

  • Most owners can wind down a business without help, thereby avoiding the added cost of a bankruptcy attorney and filing fees.
  • An owner can often get a better price for the assets than the bankruptcy trustee.
  • Putting a partnership into Chapter 7 bankruptcy puts the personal assets of the partners at risk.
  • Filing for bankruptcy gives creditors an instant platform in which to air disputes, thereby opening the door to litigation involving such things as fraud, a partnership dispute, or action to pierce the corporate veil .

Because of these reasons and more, it’s important to seriously consider whether the risks outweigh the benefits of closing the business through bankruptcy .

Managing Your Public Relations

If word gets out about your nonprofit bankruptcy, donors might no longer give you money, fearing it will go to pay off debts. Not only will your donors be nervous, but your vendors, suppliers and employees might also be less interested in working with and for you.

Once you file for and receive Chapter 11 bankruptcy protection, its important that you let key stakeholders know what your nonprofit insolvency means. Make sure you explain what a Chapter 11 bankruptcy is, what your plans are for getting out of your predicament, and share the timeline for when you hope to be out of bankruptcy and back on a firm financial footing.


What Type Of Bankruptcy Should A Nonprofit File

As in all cases, the type of bankruptcy filed will be based on the specifics of the situation. Like a business, nonprofits may benefit from filing Chapter 11. Of course, Chapter 11 is complex. In some cases, Chapter 7 may be more appropriate. We will review the options and help you determine which is most appropriate for your nonprofit organization.

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When Bankruptcy May Be The Wrong Solution

There are at least seven situations in which bankruptcy may not be the right option for you:

  • If all your assets and income are exempt, then you are collection-proof. In that case, most creditors can do virtually nothing to harm you even if you dont filing bankruptcy. At which point, there may not be a compelling reason to file for bankruptcy. Waiting until you are no longer collection-proof is generally more prudent than filing right away, unless you are concerned with a home mortgage, car loan, or other secured loan.
  • The debts at issue are secured by your propertysuch as home mortgages or car loansand you do not have sufficient income to keep up payments while also catching up on past-due amounts. Bankruptcy may not help you when the long-term expense of keeping your home or car exceeds your long-term income.
  • You have valuable assets that are not exempt in the bankruptcy process and you do not want to lose these assets. A chapter 13 filing may still help if you can afford the necessary payments.
  • Your main reason for filing bankruptcy is to discharge a student loan, alimony or child support obligations, court restitution orders, criminal fines, or some taxes. These obligations are difficult if not impossible to discharge in bankruptcy.
  • Because of a prior bankruptcy, you cannot receive a discharge in a chapter 7 bankruptcy. However, in most cases, a chapter 13 petition can still be filed.
  • You can afford to pay all of your current debts without hardship.
  • Should I File Bankruptcy

    Can a Nonprofit File for Bankruptcy?

    This depends on your situation. If you face major legal matters like judgments, liens, foreclosures, etc., filing bankruptcy maybe your best option, and you should speak to a bankruptcy attorney.

    If you face unpaid medical bills or other collection accounts, then bankruptcy is not always the best answer. Collection agencies are unlikely to sue, and you can get away without paying them. You can also dispute the collection accounts and have success getting them removed from your credit report.

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    How Might Bankruptcy Help The Nra Reincorporate

    When nonprofits file for bankruptcy, that generally halts pending litigation while providing more time to pay off creditors. But there is an exception for actions by governments, such as the pending lawsuit the New York attorney general filed in 2020. The bankruptcy case could give the NRA more time to proceed with reincorporation by stopping claims from creditors and also allow the bankruptcy court to decide how to distribute and organize the NRAs assets. This shift in decision-making authority for the NRAs assets may help the NRA with its reincorporation efforts.

    Drafting The Plan Of Dissolution

    If the leadership of the organization decides that winding down is the best option, the organization will need a plan of dissolution. A plan of dissolution is essentially a written description of how the nonprofit intends to distribute its remaining assets and address its remaining liabilities. The IRS also needs to be notified via Schedule N, of the IRS Form 990, Liquidation, Termination, Dissolution, or Significant Disposition of Assets. ;

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    Nra Trying To Change Venue With Bankruptcy Filing

    The National Rifle Associations bankruptcy filing came five months after the New York Attorney Generals Office sued the gun-rights group seeking to dissolve the organization. The Fairfax,Va.-based NRA incorporated as a nonprofit in New York State in 1871 and said it plans to seek court approval to reincorporate in Texas.

    The NRA and one of its subsidiaries filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division. Chapter 11 proceedings are often utilized by businesses, nonprofits and organizations of all kinds to streamline legal and financial affairs, the NRA said in a press release.

    Despite the bankruptcy filing, the NRA says it is not bankrupt or going out of business and is actually as financially strong as we have been in years. The plan aims to streamline cost and expenses, proceed with pending litigation in a coordinated and structured manner, and realize many financial and strategic advantages.

    The NRA has framed the move as dumping New York and its toxic political environment for a state thats friendlier to its mission. Some 400,000 of its 5 million members are in Texas and the NRA plans its annual convention in Houston this year. A website, NRAforward.org, includes links to a press release, a letter from CEO and Executive Vice President Wayne LaPierre, Q&A, a letter to vendors and more about the bankruptcy filing.

    All Businesses In Chapter 11 Bankruptcy

    Why Student Debtors Can’t File for BankruptcyOr Can They?

    Partnerships, corporations, and LLCs must file a Chapter 11 bankruptcy instead of a Chapter 13 bankruptcy to reorganize debts and stay in business. A sole proprietor can file a Chapter 11 bankruptcy, as well. Chapter 11 bankruptcy is similar to Chapter 13 bankruptcy in that the business keeps its assets and pays creditors through a repayment plan. However, it is usually a lot more complicated when compared to Chapter 13 bankruptcy because the business must file continuing operating reports and the plan must be approved by creditors. It’s also prohibitively expensive for most small businesses.

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    Things You Can Do Online When Filing Bankruptcy

    Whether youâre filing pro se or are using a bankruptcy attorney, there are many things that you can do online.

    • take the credit counseling and debtor education classes

    • get the official bankruptcy forms and any local forms your bankruptcy court requires

    • get your credit report, bank statements, paycheck stubs, and any other documents about your financial situation

    • get notices about your bankruptcy case via email

    • if you’re filing Chapter 13 bankruptcy, keep track of how your repayment plan is going

    Bankruptcy As An Option For Troubled Nonprofits

    Bankruptcy can become an option for a variety of reasons some avoidable and others the result of outside, unexpected forces like a serious economic recession or sudden dry-up in government funding.

    Nonprofits have an aversion to using bankruptcy as a tool. While nonprofit organizations constitute 30 percent of all corporations, they represent only 1 percent of corporate bankruptcy cases. I suspect the gap is indicative of their morality rather than their durability. Nonprofits are so anxious about reputation that they prefer risking liquidation to admitting financial distress.

    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. ;There are, however, restrictions that apply in case of a nonprofit entity transferring its property.Section 541 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.These issues can include, for instance, analysis of legal or donor restrictions on the transfer of property owned by a nonprofit. In certain industries, like healthcare, there are additional statutory obstacles, or there may be non-transferable licenses, or contracts with government or insurance companies.

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    Pro Se Only Applies To Individual Filings

    As long as you are making an individual filing, you can file for bankruptcy on your own without a lawyer or a law degree yourself. This includes both types of personal bankruptcy filings as well as business filings as long as the business is not a partnership or incorporated entity.

    You can NOT represent yourself in a partnership because you cant legally represent someone else without being a licensed attorney. Incorporated businesses cant be represented by the owner, so you must hire an attorney.

    Of course, just because you can do something it doesnt mean that you should. Even on the official website for United States Courts it states:

    While individuals can file a bankruptcy case without an attorney or pro se, it is extremely difficult to do it successfully.

    Your Credit Will Recover Faster If You Dont File Bankruptcy

    We believe everyone deserves access to a free bankruptcy ...

    If you do not file for bankruptcy and ignore the collection agencies, the credit damage you suffer will actually be less than filing for bankruptcy. Unpaid delinquent accounts are just as bad for your score as delinquent accounts included in bankruptcy. In fact, accounts included in bankruptcy are far worse than a regular unpaid collection.

    You may think that $50,000 worth of collection debt is what is hurting your score, and by filing bankruptcy, that unpaid debt will go from $50,000 to 0. The balances will, indeed, show a zero balance. However, unpaid collection debt is not included in the credit scoring algorithm.

    Its the 15 collection accounts that are hurting your score. The number of collection accounts is what impacts your score, not the balances. This is why paying collections does NOT;improve your credit score.

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    How A Bankruptcy Lawyer Can Help

    Our advice is to avoid the risks of pro se filing and seek the proper legal services. After you choose a bankruptcy attorney, they help you through the filing process. An attorney can help you:

    • Understand which debts can be discharged and which cant.
    • Accurately fill out your bankruptcy forms.
    • Know what tax consequences to expect.
    • Understand which assets you can keep.

    This is just a small sample of what a bankruptcy attorney can do for you. Filing without a lawyer is possible, but requires so much work on your part and leaves plenty of room for error. Letting your lawyer provide legal advice and handle the difficult stuff also gives you more time and energy to repair your credit score.

    Need help starting the filing process? Were here so you can get the fresh start you need.

    Requirements To Maintain 501 Status

    The government intends for nonprofit entities to remain nonprofit entities, so they set up some rules that tax-exempt organizations must obey in order to keep their tax-exempt status. Not knowing the rules isnt an excuse for disobeying them. Those who try to blur or cross the line could end up with fines or face other legal consequences.

    Here are six things to watch out for:

  • Private benefit. Organizations that apply for tax-exempt status cannot serve the private interests, or private benefit, of any individual or organization besides itself past an insubstantial degree. Therefore, a nonprofit may not permit any of its income or assets to benefit insiders, such as board members, officers, directors and important employees.
  • Nonprofits are not allowed to urge their members to support or oppose legislation. They may participate in a small amount of lobbying, but lobbying activities may not exceed a certain amount of the organizations total expenses.
  • Political campaign activity. A nonprofit organization may not financially support or endorse any political candidates verbally or in writing. They may not oppose candidates either. This rule applies to candidates at every level local, state and federal.
  • Operate in accord with stated nonprofit purposes. An organization that makes a big shift from being unprofitable to making money needs to re-file as a for-profit entity and to pay the applicable taxes.
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    Filing Bankruptcy Without A Lawyer Using Upsolve

    Upsolve is a digital legal aid nonprofit for low-income individuals who canât afford to pay a bankruptcy lawyer for their simple Chapter 7 bankruptcy case. Upsolve is not a bankruptcy petition preparer. We provide you with an online web app to simplify the process of preparing your own bankruptcy forms for free.

    Upsolve is funded by the federal government , and leading philanthropists like Eric Schmidt, former CEO of Google. Hereâs how it works.

    A Judge Decides Your Case

    How to File for Chapter 7 Bankruptcy for Free

    With chapter 7, the bankruptcy judge appointed to your case will make a decision on whether your debts can be discharged. If so, the judge will issue a court order discharging your debts.

    With chapter 7 bankruptcy, you wont typically need to appear in court unless an objection is raised. If you file chapter 13, you may have to appear before a bankruptcy judge for a plan confirmation hearing.

    Jack_the_sparow / shutterstock.com

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    Cooperating With The Trustee

    Bankruptcy filers have an obligation to cooperate with the trustee throughout their bankruptcy case. Filers will need to provide the trustee with a copy of the tax return for the year the case was filed.

    After the meeting of creditors the trustee will file a Report of No Distribution indicating that no funds are going to be distributed to your creditors or a Notice of Claims Bar Date stating the due date for creditors to file claims to receive funds in your bankruptcy. Other than these filings, ideally you will not hear from the trustee after the meeting of creditors.

    Are Assets Held By Charity Sufficiently Restricted To Be Excluded From Bankruptcy Estate

    Donors usually may impose restrictions on the use of their contributions, which may be as broad or narrow as the donor imposes subject, of course, to the charitys acceptance of such restrictions and potential limitations under the law.

    The restrictions may also limit the charitys ability to expend the principal by limiting expenditures by the charity to the annual income generated by the charity or to an annual spending rule based upon a specified percentage of the value of the principal.; The restrictions may be memorialized in different types of documents, such as an inter vivos gift agreement, the terms under a will, an endowment fund agreement, or the provisions of a charitable trust.; Restrictions may also arise even in the absence of a written document, such as where gifts are solicited from donors based on the charity making representations regarding the specific use or purpose to which contributions will be put and the donors contribute in reliance of such representations.;;

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    A Trustee Liquidates Assets

    With chapter 7 bankruptcy, the court-appointed trustee will liquidate your nonexempt assets to convert them to cash to pay unsecured creditors such as credit card companies who filed claims with the court. If all your assets are exempt, the trustee will file a no asset report with the court and unsecured creditors will receive no distributions.

    zimmytws / shutterstock.com

    When Should I Declare Bankruptcy

    How To File Bankruptcy Without A Lawyer

    When asking yourself Should I file for bankruptcy? think hard about whether you could realistically pay off your debts in less than five years. If the answer is no, it might be time to declare bankruptcy.

    The thinking behind this is that the bankruptcy code was set up to give people a second chance, not to punish them forever. If some combination of bad luck and bad choices has devastated you financially, and you dont see that changing in the next five years, bankruptcy is your way out.

    Even if you dont qualify for bankruptcy, there is still hope for debt relief. Possible alternatives include a debt management program, a debt consolidation loan or;debt settlement. Each one of those choices typically require 3-5 years to reach a resolution, and none of them guarantees all your debts will be settled when you finish.

    Remember that bankruptcy carries significant long-term penalties. It is stuck on your credit report for 7-10 years, which can make getting loans in the future very difficult.

    The flip side of that is there is a great mental and emotional lift when all your debts are eliminated, and youre given a fresh start.

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