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May insolvent charity pay bonuses on dissolution?

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May insolvent charity pay bonuses on dissolution?

If a 501 (c)(3) is considering dissolution and it "owes" money to vendors, can it award severance or bonuses to staff?

When you say that the organization “owes” money to vendors, I assume that it owes more than the net assets available to pay all of the claims upon dissolution.  In that case, a payment of severance or bonuses that is not based on a pre-existing contract would be improper. 

Creditors cannot force a nonprofit into bankruptcy under federal law and in many cases it is not practical even to bring suit if the amounts in controversy are relatively small.  But since there may be no practical remedy for the vendors, it may be possible to negotiate to give them a percentage of the amount due so that there is something left to compensate the staff.

Monday, June 1, 2009
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