What happens when a church goes bankrupt?

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Dec. 4 2002 6:19 PM

What Happens When a Church Goes Bankrupt?

Faced with the possibility of having to pay more than $100 million in damages to alleged sexual abuse victims, the Archdiocese of Boston is weighing whether to file for Chapter 11 bankruptcy. What happens when a church goes belly up?

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Unlike businesses, charitable organizations like churches cannot be forced into bankruptcy by their creditors, but they can opt to file on their own. Such filings are rare, but according to the Boston Globe the Dallas diocese got Vatican permission to file for bankruptcy in 1997 after a jury awarded $119.6 million to the victims of an abusivepriest. The diocese never actually filed, but the mere threat of bankruptcy resulted in a settlement for the more modest sum of $31 million.

Once a holy entity like a church seeks a business-oriented remedy like Chapter 11, it has to go through the same procedures as everyone else. Despite the stigma associated with bankruptcy, Cardinal Bernard Law's archdiocese may file as a way of avoiding years of expensive litigation. Filing for Chapter 11 doesn't constitute an admission of guilt: In the business world companies often go straight to bankruptcy court before anyone has won a case against them.

The advantage for the archdiocese is that a bankruptcy filing would stay the civil lawsuits against the church. When a bankruptcy petition is filed, the filing constitutes an automatic federal court injunction that bars anyone from proceeding with a suit against the debtor. So a bankruptcy court—instead of a civil court—would determine what the 450 sexual abuse plaintiffs' claims were worth, if anything. The bankruptcy court's decision is final unless the proceeding is prematurely dismissed, at which point the abuse cases could resume in civil court.

But here's the disadvantage for the archdiocese: If the bankruptcy court decides the church owes the alleged victims a large sum of money, it is going to be obliged to pay them as typical Chapter 11 "creditors" and not necessarily on its own terms. The church would get the opportunity to put forward an initial payment plan, but if the proposed settlement isn't acceptable to the victims, the bankruptcy court could go with a payment plan much less advantageous to the church.

What money would the archdiocese use to pay off its "creditors"? In a typical Chapter 11 reorganization procedure, a business might cut back on its less productive or cost-efficient operations to increase its cash flow. But it's hard to apply concepts like productivity to a religious entity, and since donations have declined dramatically in the wake of the scandal, the archdiocese would probably have a rough time paying off its creditors through income alone. The church might have to liquidate some of its assets. No need to start auctioning off pews, bibles, and religious relics—the Boston Archdiocese has a very worldly $1.3 billion in real estate holdings.

Click here to read an "Explainer" on Chapter 11 bankruptcy.

Explainer thanks Walter W. Miller Jr. of the Boston University School of Law.

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