| For purposes of this article, usage of the word | | | | corporation does not affect their individual liability |
| corporation also includes partnerships and LLCs. | | | | either way. |
| Many times, corporate owners looking into | | | | So, in short, whether or not a corporation |
| bankruptcy aren't actually concerned with the | | | | receives a discharge of debts is a big "who |
| effect on the corporation, but on themselves | | | | cares?" because it simply doesn't affect anything. |
| personally. This article examines the fallacies and | | | | If a corporation is going out of business, it simply |
| misconceptions held by many such corporate | | | | doesn't matter whether the debts are discharged |
| owners. | | | | or not because the corporation's creditors will just |
| There are two bankruptcy choices for a | | | | sue the corporation and recover against whatever |
| corporation: Chapter 11 or Chapter 7. | | | | assets of the corporation are available and that |
| Chapter 11 allows the business of the corporation | | | | does not affect the principals of the corporation. |
| to continue and reorganize the debts by proposing | | | | Most of the time, these corporate owners are |
| a repayment plan to creditors. Creditors get to | | | | actually looking to do is file a bankruptcy for |
| vote for or against the plan. A full treatment of | | | | themselves personally. In such cases, they should |
| Chapter 11is beyond the scope of this article. | | | | consult with a bankruptcy attorney about an |
| Chapter 7 is a liquidation of the corporation's | | | | individual bankruptcy case. |
| assets. When a Chapter 7 case is filed a | | | | But, there are times where filing a Chapter 7 case |
| corporation must stop doing business, if it is still | | | | for a corporation is beneficial such as where the |
| operating. A Trustee is appointed to sell the | | | | corporation has assets and wants to stop doing |
| corporate assets and disburse the proceeds in | | | | business. In such a case, having an independent |
| accordance with statute to creditors. It is very | | | | Trustee appointed to sell and disburse assets to |
| important to understand that corporations do | | | | creditors can eliminate that responsibility for the |
| NOT receive a discharge of debts in a Chapter 7 | | | | owner(s) of the corporation and releases them |
| case. | | | | from liability for not having properly disbursed |
| Many corporate owners are confused about this | | | | corporate assets and winding up the corporation |
| basic truth. The confusion apparently stems from | | | | properly. this satisfies the fiduciary duty all |
| the fact that many business owners do not | | | | corporate officers have to the corporation's |
| understand that a corporation is a separate legal | | | | creditors when a corporation becomes insolvent. |
| entity (which is, presumably, why it was formed | | | | Another benefit of filing a Chapter 7 for a |
| to begin with). Whether or not a corporation files | | | | corporation is that it puts all the corporation's |
| bankruptcy has nothing to do with any personal | | | | creditors on notice that the business is terminating |
| obligation the owners or officers of the | | | | and whatever assets may be available will be |
| corporation may have. For example, if the owner | | | | distributed through the bankruptcy, and that will |
| of a corporation signed personal guarantees on | | | | be all. Thus, there would be no reason for the |
| certain corporate debts, or has personal tax | | | | creditors to sue the corporation post-bankruptcy, |
| liability for corporate tax obligations (such as | | | | whereas if a bankruptcy is not filed, the owner of |
| employee payroll trust fund taxes), that obligation | | | | the corporation may have to continually appear in |
| does not disappear unless and until those debts | | | | court to inform the judgment creditors that the |
| are paid. So unless there are enough assets | | | | corporation is no longer operating and has no |
| available in the corporation to pay all those debts, | | | | assets. |
| the owner will still be obligated on those debts for | | | | It can help when you're consulting with a |
| which they are personally liable regardless of what | | | | bankruptcy attorney to understand the basic |
| the corporation does. Filing bankruptcy for the | | | | concepts above. |