5 Reasons Not To File A Chapter 7 Bankruptcy for a Corporation

14 Jun 5 Reasons Not To File A Chapter 7 Bankruptcy for a Corporation

(And One Good Reason Why You Should)

Do you have a business that is in a corporation? Is it failing and you think you need to file a bankruptcy case to get rid of the business debts? Don’t!

Why shouldn’t you file a bankruptcy for a corporation? Let me count the ways:

  1. No Discharge of Debts – Corporations don’t get a discharge in bankruptcy. What that means is that the debt does not go away. Once the assets of the business are liquidated, there should be nothing left for anyone and the corporation ceases to function. But if the corporation later comes into any additional money or assets before it is dissolved under the state laws, the debt is still there that has to be paid.
  2. Transfers can be Undone. – Payments to corporate officers and owners can be attacked. Under the Bankruptcy Code, any transfer to an insider within one year prior to the filing of the bankruptcy can be undone by the Chapter 7 Trustee. That mens salary, payment on corporate officer loans, retirement benefits ,etc. may be exposed to recovery by the Trustee. Just about anything that has come from the corporation to the individual can be reversed. Even if you can prove that it is a transfer under proper circumstances, you will be faced without he expense of defending actions of the Trustee.
  3. No Attorney-Client Privilege -There is no attorney-client privilege. Let me say that again -there is no attorney-client privilege.Anything an owner or officer of the corporation may have told a lawyer for the company is not protected. The relationship between the company and the lawyer is governed by the Bankruptcy Code and that information is the sole domain of the Chapter 7 Trustee.
  4. Administration by the Chapter 7 Trustee – Every action of the company and every action of the officers running the company is open to inspection. There is no authority to continue operating the business so the division between business and personal assets and liabilities can be painful.
  5. Personal Guarantees Survive – Most small businesses, even if they are incorporated, bear the personal guarantees of the owners for every loan or vendor account. So when the business goes out of business, most of the debt remains even of the company is liquidated in a Bankruptcy case. That means the ;lenders and vendors to the business can come knocking on your door looking for payment notwithstanding the bankruptcy filing.

So filing a bankruptcy for a business generally doesn’t do the owners or officers any real good.

However there is one really good reason to file if that one reason trumps all the downside. As in #2 above, assets transferred out of the company will be recovered by the Trustee assigned to the case. Recovery of assets will result in redistribution of that money. If that redistribution will result in payment of certain debts that would otherwise be payable by the owners or officers of the business, some good can result.

For example, the IRS is a priority in any case. If there is money owed for payroll taxes, that liability might comes down to the officers under the 100% penalty rule. If recovery of assets for the company leads to a redistribution, the IRS will be among the first re-paid from that money. If that happens, the officers of the company will be released from that liability as a result. And that is a good result from filing a Chapter 7 Bankruptcy for a corporation.

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.


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