Bankruptcy and Gift Annuities: “Keep Calm and Carry On”
On October 2nd, 2013, the Chronicle of Philanthropy reported The New York City Opera was entering Chapter 11 bankruptcy protection and would “wind down” its operations after 70 years. The news prompted anxious calls from charities and gift annuitants to us here at PG Calc. They all had the same concern: what happens to gift annuitants when a charity goes into bankruptcy?
The good news is that such circumstances have been incredibly rare. Based on the few occasions where it has occurred, it seems likely that those with annuities issued by the bankrupt organization will be protected. Here are two key factors to understand in addressing questions that may come from your boss or your annuitants and other constituents.
Factors to Remember
- The type of bankruptcy filing matters. If it is a Chapter 11 bankruptcy filing, as in the case of The New York City Opera, payments on obligations typically continue as is, while the bankruptcy proceeds and while certain debts are sought to be restructured. A Chapter 11 bankruptcy shouldn’t cause any immediate change in payments to annuitants.
On the other hand, a Chapter 7 filing means that the charity ceases operations and a trustee appointed by the court sells all the assets and distributes the proceeds to the charity’s creditors. A gift annuitant is considered a general creditor of the charity and their right to be paid is subordinate to the charity’s secured creditors.
- Was the organization required to maintain a segregated reserve fund? If the issuing charity established a segregated reserve fund as required by a state in which it issues annuities, an annuitant may be in stronger position. One charity received court approval to continue making payments from its segregated reserve while the case was pending. That charity ultimately emerged from bankruptcy, so there was no final ruling on whether the reserve assets were protected from other creditors. However, there is a strong argument to be made that assets in a segregated reserve fund are held solely for the purpose of paying the annuitants. State regulatory officials have led PG Calc to believe that compliance with statutory reserve requirements protects gift annuity assets.
As was noted above, in a Chapter 11 bankruptcy, the organization may emerge and resume operations, with the annuity payments continuing on just as they had before the filing. Another outcome that has occurred is that the court could order a lump sum payment to each annuitant instead, in an amount equal to the present value of the life-time payments. The likelihood of receiving payment is much higher in a Chapter 11 reorganization than with a Chapter 7 liquidation.
If you get a call from an anxious annuitant, the most important message to convey is, as the British would say, to “Keep Calm and Carry On.” You can’t predict what will happen in a specific bankruptcy proceeding. But, you can let them know how rare such situations are, and provide reassurance about your organization’s financial security.
Wondering how your gift annuity program measures up?