Eighty vulnerable adults are facing eviction from their shelter after the charity which runs it said its financial situation had become "critical".
Wick House in Bristol looks after the residents, some with with serious personality disorders, depression and alcohol and drug addiction.
Trustees warned the charity would run out of cash "in a matter of weeks".
Bristol City Council said its homeless prevention team was "ready to act".
It said hostel operators assumed housing benefit would be paid "which is largely unobtainable since the introduction of Universal Credit".
"Without meeting these criteria the law does not allow the council to pay the housing benefit," a spokesman said.
Roy Fisher, trustee of Selworthy House Addiction Recovery Enterprise (Share) which took over the hostel in Brislington last year, said once the charity became insolvent Share and its residents would have to leave.
He said the council was "failing" to pay Share the £71-a-week housing benefit for many residents, a claim the authority strenuously denies, and said it was a "complex issue and its hands are tied".
The issue emerged after the authority issued planning enforcement notices on Wick House, and the landowner, in February, ordering Share to carry out remedial works dating back years by the previous organisation that ran the shelter,
Unauthorised work at the listed building doubled the capacity from 43 occupants as permitted under planning permission to almost 90, the Local Democracy Reporting Service said.
Seven people died at the hostel when it was run by Bristol Sheltered Accommodation and Support Ltd (BSAS).
In September 2019, the Charity Commission concluded an investigation into BSAS which found evidence of misconduct and mismanagement, including its failure to report the deaths of residents to the commission and for making unauthorised payments of almost £50,000 to one of its trustees.