August 2009 Board Talking Points: Chapter 7 Bankruptcy Filings As nonprofit corporations expend their cash reserves to preserve programs during a time of limited resources, many organizations will find it difficult to continue to pay expenses as they become due. Mounting debt will jeopardize the ability of nonprofit corporations to continue to deliver program services and some will consider filing for bankruptcy protection in order to liquidate their assets in an orderly fashion. Questions Regarding Chapter 7 Bankruptcy Filings: 1. What does it mean for a corporation to file for Chapter 7 bankruptcy? 2. Can a not-for-profit corporation file for bankruptcy? 3. How does Chapter 7 work? 4. What are the advantages of filing for Chapter 7? 5. What are the disadvantages of filing for Chapter 7? More Detailed Information: 1. What does it mean for a corporation to file for Chapter 7 bankruptcy? The Bankruptcy Code is a federal statute that is designed to offer both corporations and individuals an opportunity to get some breathing room and to either reorganize or liquidate assets under the protection and supervision of the Bankruptcy Court. Chapter 7 is the liquidation provision of the Bankruptcy Code. The entity that files the bankruptcy petition is called the debtor and the day on which a bankruptcy petition is filed is called the petition date. 11 U.S.C. §101 (13A) (1978) (hereinafter the “Bankruptcy Code”). All debts that arise on or before the petition date are considered “pre-petition” debts. Pre-petition debts will be paid in priority order as established by the Bankruptcy Code. Bankruptcy Code §507. 2. Can a nonprofit corporation file for bankruptcy? Nonprofit corporations, including those that are exempt under section 501(c)(3) of the Internal Revenue Code, can file a voluntary petition for bankruptcy protection. A person can file for bankruptcy protection. Bankruptcy Code §109. A corporation is considered a person within the meaning of the Bankruptcy Code. Bankruptcy Code §101(41). Courts have interpreted the Bankruptcy Code as barring the filing of an involuntary petition against an exempt organization. An involuntary petition is when creditors file a bankruptcy petition on behalf of a debtor. Involuntary proceeding cannot be filed against a corporation that is not moneyed, business or commercial corporation. Bankruptcy Code §303(a). The term “not moneyed, business or commercial corporation: has been interpreted by Courts as to apply to not-for-profit corporations. See In re Memorial Medical Center, Inc., 337 B.R. 388 (Bankr. NM 2005); and In re Grace Christian Ministries, Inc. 287 B.R. 352 (Bankr. PA 2002). 3. How does Chapter 7 work? Chapter 7 is the liquidation provision of the Bankruptcy Code that is available to both corporations and individuals. Bankruptcy Code §109(b). A Trustee will be appointed to collect any money owed the estate and to liquidate all of its assets. Bankruptcy Code §§701, 702. In most instances, day- to-day operations of the debtor cease immediately upon the filing of the petition although the Trustee can be authorized to continue operations for a limited period of time. Bankruptcy Code § 721. The debtor is responsible for filing comprehensive schedules and statement of financial affairs that detail its assets and liabilities and identify all of its creditors. Bankruptcy Code §521(a)(1) and Bankruptcy Rules 1007. Copies of the bankruptcy petition and bankruptcy schedules and statement of financial affairs are available at http://www.uscourts.gov/bkforms/bankruptcy_forms.html#official. The Debtor must pay a $245 case filing fee, a $39 miscellaneous administrative fee, and a $15 trustee surcharge. The Court does not have the ability to waive the fee for a corporate debtor who cannot pay. Bankruptcy Rules 1006. The Debtor must cooperate with the Trustee in their efforts to collect assets and appear at a meeting of creditors. Bankruptcy Code §341. The Trustee is responsible for, among other things, collecting and liquidating property of the estate and investigating the financial affairs of the Debtor. Bankruptcy Code §704. The Trustee will receive a commission on all property of the estate that is distributed and expenses incurred by the Trustee will be paid from the assets of the estate. If the Trustee determines that the Debtor has assets that worth trying to collect and liquidate he can seek authorization from the Court to abandon in any and all the assets. Bankruptcy Code §554. If the Trustee abandons all of the Debtor’s assets, the Chapter 7 proceeding will become a “no asset” case and creditors will not receive any distribution. If the Trustee determines that there are assets to be administered, then creditors will receive information about how to file a claim in the bankruptcy case. Bankruptcy Rules 3002 & 3003. A copy of Official Form 10, the form that is used to file a proof of claim, is available at http://www.uscourts.gov/query.html?qt=official+form+10&pw=798&ws=0&col=uscourts&r f=1&IMAGE.x=0&IMAGE.y=0 Creditors claims are paid in accordance with the priority established by the Bankruptcy Code. Bankruptcy Code §§ 507, 726. 4. What are the advantages of filing for Chapter 7? Once the Board of Directors makes the decision to cease operations filing Chapter 7 bankruptcy offers a few benefits. The automatic stay will come into effect immediately upon the filing of the petition and prevent a creditor from gaining control of assets ahead of other creditors. Bankruptcy Code §362. The Trustee will be appointed and will have the authority to collect receivables (for example, monies owed on government contracts) and liquidate all assets to pay claims. Bankruptcy Code §§701, 702. The bankruptcy process allows for the orderly liquidation of the corporation's assets and the wind down of its business. Creditors will receive a proportional share of the assets of the estate according to priority established by the Bankruptcy Code. Bankruptcy Code §§ 507, 726. 5. What are the disadvantages of filing for Chapter 7? There are several disadvantages to a Chapter 7 filing. The most significant is the fact that a discharge is not available to a corporation in Chapter 7. Bankruptcy Code §727. A discharge is essentially a forgiveness of prepetition debts that are not paid through the bankruptcy process. Therefore, if the estate does not have sufficient assets to pay all of its debts the unpaid debts will "survive" the bankruptcy process and creditors can still legally pursue payment. At the end of the bankruptcy process the nonprofit corporation will still have to be dissolved through a state law dissolution proceeding. See New York Not-for-Profit Corporation Law Article 11 (McKinneys 2009). Chapter 7 can be an expensive process since the Trustee's fees, as well as the fees of any committees formed such as the Unsecured Creditors Committee; will be paid from the estate before any creditors are paid. Bankruptcy Code §705. This alert is meant to provide general information only, not legal advice. Please contact Linda Manley at Lawyers Alliance for New York at (212) 219-1800 x 239 or visit our website www.lawyersalliance.org for further information. Lawyers Alliance for New York is the leading provider of business and transactional legal services for nonprofit organizations that are improving the quality of life in New York City neighborhoods. Our network of pro bono lawyers from law firms and corporations and staff of experienced attorneys work together, delivering expert corporate, tax, real estate, employment and other legal services to community organizations. By connecting lawyers, nonprofits and communities, we help nonprofits to develop affordable housing, stimulate economic development, and operate vital programs for children and young people, the elderly, recent immigrants, and other low-income New Yorkers.
Pages to are hidden for
"New York Chapter 7 Bankruptcy Lawyers"Please download to view full document