If your nonprofit in California is struggling, you don’t necessarily have to shut it down. Bankruptcy law allows nonprofits to file for Chapter 11 bankruptcy.
Nonprofits have the option to continue operating under a Chapter 11 bankruptcy. It delays your repayment of debts and allows you to reorganize. Creditors can’t attempt to collect debts from you when a judge approves your request for Chapter 11 bankruptcy.
If you file for Chapter 11 bankruptcy, then you need to submit a reorganization plan. A judge will put together a creditor’s committee to listen to your story. The creditor’s committee consists of your lenders. They may accept your plan, propose modifications or reject it. Creditors could also ask the judge to liquidate your business.
Judges take several factors into consideration before making a decision on Chapter 11 bankruptcy. They are more likely to accept plans if the business has employees or other businesses that rely on it. Ideally, judges want to ensure repayment for creditors, which might not happen if the business has to go through a Chapter 7 bankruptcy.
There are rules in place when a judge accepts your request for Chapter 11 bankruptcy. You must provide regular reports to the judge and the creditor’s committee. Nonprofits have a limited right to transfer property during bankruptcy. Failure to follow the conditions of your plan may result in revocation or modification of the agreement.
Nonprofits often fear telling their stakeholders about bankruptcy, but you may want to do this on your own. By informing them, you get to explain what a Chapter 11 bankruptcy is and your timeline for improving your financial situation. This could help keep stakeholders calm.
Chapter 11 bankruptcy is an option for nonprofits that would allow them to continue operations. The goal is to get your business back on its feet.