Idaho nonprofits struggling with unmanageable debts might worry that they will be forced to close if they file for bankruptcy protection. Fortunately, however, both nonprofit and for-profit businesses can continue operating their companies even after filing for bankruptcy when they elect to reorganize their debts under Chapter 11 of the U.S. Bankruptcy Code.
Chapter 7 vs. Chapter 11 business bankruptcy
Nonprofits have two main options when they need to file for bankruptcy, including filing under Chapter 7 or Chapter 11. Chapter 7 bankruptcy involves liquidating the company’s assets to repay a portion of its debts. Businesses that go through Chapter 7 bankruptcy will have a trustee appointed. The trustee will liquidate their assets, and the business will be forced to close. By contrast, Chapter 11 bankruptcy does not involve liquidating the company’s debts. Instead, nonprofit organizations that file for protection under Chapter 11 will reorganize their debts and may continue operating while their bankruptcy is pending.
How Chapter 11 bankruptcy works
Under bankruptcy law Chapter 11 bankruptcy requires businesses to submit a plan to reorganize their debts. A creditor’s committee comprised of the nonprofit’s creditors must approve the reorganization plan and can submit their own plan to the bankruptcy court. The nonprofit’s board and executives will be allowed to continue their operations as long as the company complies with the orders of the court and submits its payments under its reorganization plan.
If a nonprofit in Chapter 11 fails to comply with the court’s orders or to make timely payments as called for in its plan, the judge can dismiss the bankruptcy case or convert it to a Chapter 7 bankruptcy case. If the case is dismissed, the nonprofit will no longer be protected from its debts. The creditors will then be allowed to pursue collection activities. If the case is converted to a Chapter 7 bankruptcy, the assets will be liquidated by the trustee, and the nonprofit will be forced to cease operations.