A good query! When does it make sense for a company to file for bankruptcy, given that a corporation doesn’t receive a discharge under Chapter 7? Why not just shut the doors, liquidate the assets, and let the state declare the corporation to be dissolved?
Positive aspects of corporate bankruptcy
Under our opinion, a corporation should only file a Chapter 7 petition in the following two circumstances:
When an asset that may be used to pay obligations for which the shareholders or executives are personally accountable, such as trust fund taxes, is about to be encumbered by a lien or levy.
When hiring a bankruptcy trustee is preferable in order to monitor the liquidation of assets and close down the company, releasing the executives to look for work, etc.
Whether or whether the officials are legally accountable for the debt, declaring bankruptcy may deter creditors from suing the business, which frequently involves the officers and shareholders personally.
Keep in mind that typically, the corporation’s stockholders benefit from each of those advantages. Since the corporation doesn’t receive a discharge under Chapter 7, the outstanding obligations will still be attached to the corporate shell.
The drawbacks of filing
It might be difficult to prevent individual bankruptcy filings for the shareholders if the business files for bankruptcy.
It is the responsibility of a bankruptcy trustee to look into the company’s operations and its financial interactions with the insiders. A corporate bankruptcy trustee can, at most, request records and time from the officials in order to explain the corporation’s predicament. In the worst case scenario, the trustee may file a lawsuit to collect debts or advances given to the executives.
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Payments paid on lawful obligations due by the corporation to insiders or creditors whose debts the insiders have guaranteed may be recouped by a trustee. In other words, if a firm declares bankruptcy, problems that wouldn’t normally be considered “problems” might start to cause problems.
If one manages to avoid bankruptcy, it’s crucial that all of the corporation’s debts be settled before the shareholders receive anything in exchange for their shares. It is acceptable to pay third party creditors as well as insiders for the obligations the company owes them. After creditors have been satisfied, equity holders (shareholders) only receive payment for their ownership stake.