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Can a Church File for Bankruptcy?

Posted on in Bankruptcy Attorney Illinois
Can a Church File for Bankruptcy?

Yes, a church can file for Chapter 11 bankruptcy if it reaches a level of debt that it cannot repay on its own. Because a church is not a for-profit company, different rules apply to a church bankruptcy. Churches and other religious organizations can file for Chapter 11 to work out debts and avoid accruing new debt in the future by restructuring, just like private companies do. Often, churches accrue debt from their mortgages and the other expenses of operation. There have been cases in which churches have filed for bankruptcy as a way to settle claims of sexual abuse. By filing for bankruptcy, the churches are protected from debt collection efforts and may be able to reduce the amount of compensation they are ordered to pay to their victims in the event their clergy or other church officials are found guilty of sexual abuse or other forms of mistreatment.

A Church Cannot be Forced into Involuntary Bankruptcy

One significant difference between church bankruptcies and bankruptcies involving private companies is that a church cannot be required to complete an involuntary bankruptcy. An involuntary bankruptcy occurs when a company's creditors file a bankruptcy petition with the court to start the bankruptcy process. This is only possible when certain circumstances are met, which include:

  • If the indebted company has 12 or more creditors, at least three must file the bankruptcy petition together. When the company has fewer than 12 creditors, only one must file the bankruptcy petition; and
  • The indebted company must owe at least $14,425.

Involuntary bankruptcy can be a complicated process. Usually, it is a last resort for creditors.

What Happens After a Church Files for Bankruptcy?

In a Chapter 11 bankruptcy, the filing party reorganizes in an effort to cut the parts of its operation that waste money and increase those that bring in money in order to repay its creditors. Like with a Chapter 13 bankruptcy, a Chapter 11 bankruptcy involves the development of a repayment plan that allows the indebted party to slowly repay its debts with its new cash flow.

Unlike a private company, a church does not engage in activities meant to turn a direct profit. Rather, churches rely on donations from their members, and when membership dwindles or the members of a congregation tithe less than they did previously, the church can face financial trouble. In some cases, this drives the church to liquidate its assets, which can include church furniture, equipment, and real estate holdings.

Work with an Experienced Buffalo Grove Bankruptcy Lawyer

To learn more about bankruptcy and the different requirements for businesses, non-profit organizations, and individuals who are facing insurmountable levels of debt and considering filing for bankruptcy, speak with an experienced bankruptcy lawyer. Contact our team of bankruptcy lawyers at Newland & Newland, LLP today to set up your initial consultation in our office. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.

(image courtesy of Daniel Tseng)

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