Bankrupting the Faith

Abstract

This Article presents the results of a comprehensive empirical study of religious organizations that filed bankruptcy under Chapter 11 from the beginning of 2006 to the end of 2011. It examines the institutions’ characteristics, reasons for filing, and case outcomes to investigate whether Chapter 11 is an effective solution to their financial problems. In investigating the religious organizations’ cases, the Article also assesses the role of bankruptcy courts in adjudicating Chapter 11 cases and places the cases within theories about the larger purposes of Chapter 11.

The study finds that the vast majority of debtors are small organizations that operate places of worship and seek to reorganize because of problems paying mortgages on real property. Overall, Chapter 11 has the potential to provide a productive means to revive congregations following economic downturns, transitions and failures in leadership, and problems negotiating with secured creditors. The study also confirms previous findings that bankruptcy courts on average process cases quickly and that a greater percentage of debtors confirm and consummate plans than historically thought, and suggests a need for further research into courts’ procedures for assessing plans. The analysis additionally reveals that the religious organizations’ cases straddle two main accounts of Chapter 11 as either preserving the going-concern value of a business or keeping entrepreneurs and their small businesses together. This result supports the validity of challenges to the traditional focal point of business reorganization on preserving going-concern value, and demonstrates that the business itself also must be assessed in some small business reorganizations.

Keywords: bankruptcy, Chapter 11, reorganization, religious, church, non-profit, small business