Previously posted on SSRN.

Abstract

What does a church do when it is about to go bust? Religious organizations, like any business, can experience financial distress. Leaders could try to solve their churches’ financial problems on their own. Perhaps leaders do not view the problems as addressable with law. Or perhaps they do not think, as a moral or spiritual matter, that they should resort to the legal system, such as bankruptcy, to deal with their churches’ inability to pay its debts. Yet about ninety religious organizations seek to reorganize under the Bankruptcy Code every year. This Article relies on interviews with forty-five of these organizations’ leaders and attorneys to examine how the leaders conceptualized their churches’ financial distress as legal problems and decided to address those legal problems with bankruptcy.

Through these inquiries, the Article sheds light on longstanding questions about how people and organizations decide to use the legal system versus doing nothing or solving problems through self-help. The Article thus provides one of the first assessments of how small organizations view their problems as legal problems, and the first assessment of how leaders of small organizations decide to file for bankruptcy.

Church leaders’ journeys began with struggling to solve their congregations’ financial problems themselves and proclaiming that “bankruptcy from a spiritual standpoint is a no-no.” Most often, creditors’ foreclosure threats brought law to leaders’ attention. Leaders then turned to social networks for help understanding their legal options. Drawing from these results, the Article also scrutinizes how leaders’ reliance on social networks and feelings of stigma and shame because of their decisions to file influence debates about restricting access to bankruptcy.

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