Corporations and limited liability companies often threaten to eliminate debts by filing chapter 7 bankruptcy. It is important to understand that corporations and limited liability companies cannot discharge debts via chapter 7 bankruptcy.
When an entity files chapter 7, Bankruptcy Code § 362 prohibits creditors from taking collection steps. A chapter 7 trustee is appointed and asked to identify and liquidate the entity’s assets. The proceeds are then distributed to creditors.
When the trustee’s work is complete, the bankruptcy case will be closed. At that point, the automatic stay terminates and creditors may immediately reinitiate their collection efforts, as if the bankruptcy case never happened. In other words, unlike individuals who file bankruptcy, entities do not receive a discharge in chapter 7.
Given this fact, it is often wise to continue your collection efforts post-bankruptcy because either: (a) the trustee did not identify valuable assets during the bankruptcy case, or (b) the entity acquired assets after the date of the bankruptcy filing.
When negotiating with entities pre-bankruptcy and attempting to collect post-bankruptcy, it is important to understand that corporations and limited liability companies cannot discharge debts in chapter 7 bankruptcy.