Does chapter 7 bankruptcy make sense for my corporation?

Should My Corporation File for Bankruptcy?

When an individual is considering filing for bankruptcy they often want to know whether their corporation should file as well. Chapter 7 bankruptcy typically will not help a corporation.  This is because corporations cannot receive a “fresh start” or discharge of debts. The Bankruptcy Code provides that the “court shall grant the debtor a discharge, unless … the debtor is not an individual….”

Will the Business Continue?

Where there is no hope for the corporation to continue as a successful business, filing bankruptcy on behalf of the entity is often unnecessary because, at least with respect to those debts incurred in the name of the corporation, the corporate form itself provides sufficient protection.  Simply closing the doors, liquidating the assets (if any), and terminating the corporate existence should be sufficient. Be aware however, that in many cases creditors will require owners of corporations to personally guarantee their business debts. In this case, the business owner may benefit from filing bankruptcy individually as this will eliminate his obligation to pay the debts of the corporation out of his own pocket.

When Chapter 7 Bankruptcy Might Make Sense for a Corporation

In some limited circumstances it may make sense to file Chapter 7 bankruptcy on behalf of a corporation, even though a discharge is not available. Such a situation may be presented where a creditor is poised to lien or levy on assets that could be used to pay debts for which the shareholders or officers are personally liable, such as trust fund taxes or leases or other obligations that are personally guaranteed. Another example is when the services of a trustee are desirable to preside over the liquidation of assets and the winding up of the business, freeing the corporation’s officers to pursue employment or other endeavors. Keep in mind that this can cut both ways.

If there truly are significant assets for a trustee to administer chapter 7 bankruptcy may make sense for a corporation. Trustees will get a little upset however, if they are forced to waste time dealing with a shell of a corporation with nothing to administer. A third example in which it might make sense for a corporation to file for chapter 7 bankruptcy is when the filing is done to discourage creditor lawsuits which have a tendency to name the officers and shareholders of the corporation personally, even though they may not be legally liable for the debt.

As noted, this discussion assumes that the corporation is not going to continue as a viable business enterprise.  For corporations with hope of continuing, relief may be available under Chapter 11.