Bankruptcy in the nonprofit sector

Does bankruptcy make sense for nonprofits?

The Nonprofiteer isn’t smart enough to decide; but it seems to her that only one of the essential goals of bankruptcy–enabling the enterprise to continue–even applies in the sector.

The other goals–refreshing the entity’s access to credit by wiping out its old bad debts;  providing supervision in allocating assets and debts by a party without personal financial interest in the results; saving something for creditors and shareholders, often at the expense of employees–are either irrelevant or inappropriate to nonprofits, which can’t get access to credit anyway, are already governed by people without personal financial interests, and have no shareholders.

That leaves only creditors, on the one hand, and employees, on the other.  Bankruptcy would then be just the next in a long line of techniques for screwing nonprofit employees for the benefit of others who are seen as somehow more deserving, a perspective the Nonprofiteer regards as somewhere between nonsensical and disgraceful.

But what does she know?  By hypothesis, some employees will keep some kinds of jobs in a post-bankruptcy nonprofit.  Only a case-by-case analysis would reveal whether more workers would stay employed this way than through merger with a healthier compatible agency.  But no one works at a nonprofit that’s been dissolved.

It’s a sign of the economic times that these are the alternatives we’re considering.

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4 Responses to “Bankruptcy in the nonprofit sector”

  1. Anita Bernstein Says:

    “That leaves only creditors, on the one hand, and employees, on the other. Bankruptcy would then be just the next in a long line of techniques for screwing nonprofit employees for the benefit of others who are seen as somehow more deserving, a perspective the Nonprofiteer regards as somewhere between nonsensical and disgraceful.”

    Not sure that’s right, if you’re saying that employees are better off if their employer doesn’t have a bankruptcy option. I would think that people who control a nonprofit might prefer paying creditors to making payroll when they run out of money. They could dissolve the corporation after they have paid off the fatcats, even if they are not allowed to declare bankruptcy.

    The country probably need a separate nonprofits bankruptcy scheme that ranks employees ahead of other interests in the insolvency queue. Or forbids creditors from holding a security interest in the nonprofit’s property, a rule under which the powerful are privileged. (You’re shocked, shocked!) But both state and federal law would have to change.

  2. Nonprofiteer Says:

    A useful additional perspective–thanks. You’re right that a separate nonprofit bankruptcy scheme is probably necessary, though one which prevented creditors from holding security interests in a nonprofit’s property might make it even harder for nonprofits to get credit–already a serious problem. I’d be glad to see a recommendation on this subject from the bankruptcy section of the American Law Institute/American Bar Association, so that we don’t back into an ill-considered scheme extending bankruptcy to organizations ill-suited to it.

  3. Anita Bernstein Says:

    You’re right about secured credit being needed for nonprofits’ full access to loan money–I hadn’t considered that problem. But maybe nonprofits should heed Polonius and be neither lenders nor borrowers. Given the lack of an equity stake for owners, I would worry about reckless loan commitments by the ED and the Board.

    In general I suspect that employees of nonprofit businesses tend to get the short end of many sticks (perhaps because most of them are women) and, unless it gives them jobs they otherwise wouldn’t have, which I don’t think is typically the case, secured credit comes at their expense.

  4. Chrisfs Says:

    The Nonprofiteer surprises me, or has had very different experiences in her life. I worked fulltime at a nonprofit for 9 years. A nonprofit very much needs credit as much as any other entity. We own one building out right after years of paying a mortgage on it, that we obtained due to having credit. We rent another site. We also use credit day to day for ordering office equipment and supplies.
    With regards to being run by people without a personal financial interest, I am sorry to say I have seen more than my share of people who had a definite financial interest in the nonprofit they were running.

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