Life After Death for Chapter 7 Corporate Debtors? What Remains After a Corporate Liquidation

Burr & Forman
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Individuals filing for bankruptcy pursuant to Chapter 7 of Title 11 of the United States Code (the "Bankruptcy Code") generally do so to have their debts discharged and receive the proverbial "fresh start." The same, however, is not true for corporations. The Bankruptcy Code is clear that a corporate debtor does not qualify for a discharge of its debts and thus cannot begin anew. Instead, the purpose of a Chapter 7 bankruptcy for corporations is "to distribute any assets equitably among existing creditors before laying the defunct corporation to rest." The Bankruptcy Code prevents corporations from being discharged in liquidation cases because "corporations are not in the same situation as individual debtors, and the discharge of a corporation promotes trafficking in corporate shells, a form of bankruptcy fraud." If corporations were able to discharge their debt in a liquidation case, "a corporation with a substantial tax loss but with all of its debts discharged would be an attractive vehicle to shield profits."

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