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An incorporated business is ceasing operations. Should it be bankrupted?

A corporation filing chapter 7 bankruptcy is entitled to retain no property and receives no discharge of debts. There is no requirement that an insolvent corporation file for bankruptcy and for that reason, state law dissolutions or simply walking away are common. Good reasons to file a corporation into chapter 7 might include:

  • To stop a creditor from executing on valuable assets that could otherwise be utilized to pay favored creditors (e.g. trust fund taxes, wage claims or personally guaranteed debt).
  • To recover preference payments that could be used to pay favored creditors.
  • To help insulate the principals from allegations that the liquidation of the entity was handled improperly.
  • The principals would rather turn over liquidation of the entity to a trustee rather than handle it themselves.

Good reasons to avoid a corporate chapter 7 might include:

  • The assets of the corporation are very nominal.
  • The time and expense of bankruptcy.
  • The unwanted exposure and scrutiny of prior transactions.

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