Church File for Bankruptcy? What Options Are Available

The U.S. real estate and economy stalls that started in 2008 have created many not-too-apparent casualties. Among these casualties are thousands of christian mysticism across the United States. In more extreme cases, these churches have been forced to consider bankruptcy relief.

Can a church file for bankruptcy? The answer to this question is usually “yes.” There is certainly no requirement for any “church-like” congregation or religious group to create a separate legal entity in order to operate or assemble. All “churches” are generally fully protected by the U.S. Constitution to operate as they see fit. However, most churches are fully “incorporated” into a separate, legally recognized entity for taxes, accounting, and other important considerations. Usually only church entities of this complexity would be holding property within the church or incurring large amounts of debt. Any legal church “entity” is entitled to file for bankruptcy.

Churches Have Two Options for Bankruptcy: Chapter 7 or Chapter 11

Churches generally are only eligible to file for bankruptcy under Chapter 7 and Chapter 11 of the bankruptcy code. Churches cannot file for Chapter 13 relief to repair their mortgage situations because churches cannot be considered as “wage earners” or “persons” as required under Chapter 13 of the bankruptcy code. Only “people” can file for Chapter 13, not “entities.” Chapter 12 and Chapter 9 are also not available for churches because they are for “family” operations and municipalities. Therefore, church bankruptcy options are either liquidation under Chapter 7 or more costly reorganization or liquidation under Chapter 11.

Church Bankruptcy and Chapter 7

Chapter 7 bankruptcy can sometimes be a help to a church who needs to get a fresh start. If a church is willing to lose all of its corporately-held assets, it could be an option to file under Chapter 7. Although generally a church will lose everything it owns collectively, they may be able to create a “new” church entity (or entities) that could be operate without being restricted by large debt loads. If a church has a mortgaged building that it can no longer afford, they can usually return the building back to the mortgage holder and then start a new entity for the future use that will not be bogged down by the churches former debts. Keep in mind that an accountant and bankruptcy attorney is absolutely essential to guide any church group through such a process. In addition, even if a church “needs” Chapter 7 bankruptcy and to start a new entity, it is possible a Chapter 7 filing may never be necessary for the old church entity unless there is aggressive or confused collection by prior creditors. Consult a bankruptcy attorney and accountant on such matters.

Church Bankruptcy and Chapter 11

A church can file Chapter 11 in order to reorganize their financial situation. When a church is in trouble financially, Chapter 11 could reduce their mortgage obligations and cut their unsecured debts to a fraction of their former amount. Essentially, Chapter 11 is a “better” solution in society’s eyes than having a church that will eventually fall apart and fully default on ALL their debts. Therefore, the church may be able to reduce all of their unsecured debt obligations down to ranges such the 10-30% while decreasing their mortgage balance potentially to the market value for the church.

Keep in mind that it is much easier to complete a successful Chapter 11 if you are ALREADY negotiating with the mortgage company and other companies for reductions. If you already have the new terms negotiated with the mortgage company before the church Chapter 11 is filed, the rest of the case is usually MUCH easier to get approved with the court and the rest of the creditors. In addition, keep in mind that a Chapter 11 CAN stop a foreclosure on a church, but it is very important to be negotiating with the mortgage company (and looking for other options) BEFORE and UP TO THE POINT of any Chapter 11 filing. Consult with a bankruptcy attorney.

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