By: Donald L Swanson
Here are a couple discharge-related bankruptcy questions I’ve heard of late, along with an answer.
Question 1. Why are individuals, but not corporations, eligible for a Chapter 7 discharge?
- §727(a)(1) says, “the court shall grant the debtor a discharge, unless—(1) the debtor is not an individual” (emphasis added).
Question 2. Why are individuals, but not corporations, subject to § 523(a) discharge exceptions in Chapter 11?
- § 1141(d)(2) says, “A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title” (emphasis added).
Answer. Here is one answer to both questions:
- individuals are living beings, with blood coursing through their veins, who want and need to keep on living a meaningful life; and
- corporations aren’t.
A corporation may qualify as a “person,” but that’s a legal fiction. Corporations do not have veins or blood, and the demise of a corporate entity can be of small significance.
Chapter 7
–Individuals
Individuals use Chapter 7 to get a fresh financial start.
As an individual debtor’s assets are liquidated in Chapter 7 and the proceeds distributed under § 726, the individual debtor gets a discharge to effectuate a fresh financial start.
After receiving a discharge, the individual keeps on living and breathing and enjoying the benefits of the fresh financial start.
–Corporations
Corporations in Chapter 7, by contrast, receive no discharge and no fresh financial start.
Instead, once a corporate debtor’s assets are liquidated in Chapter 7 and the proceeds distributed under § 726, the corporate debtor simply ceases to live:
- there is no discharge;
- there is no fresh start; and
- the corporation has no reason to continue living.
Chapter 11
–Individuals
In every bankruptcy context, individual debtors are responsible for their own actions.
The fresh financial start for an individual debtor (under any chapter of the Bankruptcy Code) is dependent upon the individual being honest, though unfortunate.
One remedy for an individual debtor’s failure of honesty is a denial under § 523 of the debtor’s discharge. Such discharge denial is:
- a limitation on the right to a fresh start; and
- an accountability for the obligation of honesty, impairing all debtor’s future earnings and assets for as long as the debtor shall live.
–Corporations
Corporations, by contrast, don’t act. They are legal fictions.
The ones who act on a corporation’s behalf are its directors and officers—they are the ones who make corporate decisions and take corporate actions:
- and they are the ones accountable, personally, for their wrongful decisions and actions of a kind specified in § 523(a).
If a corporate debtor were to be denied a discharge, the corporation could simply liquidate and cease to exist—i.e., die. Where is the accountability in that? Under such a result:
- there is no benefit to creditors in the form of debtor’s future earnings and assets; and
- the corporate debtor’s employees, vendors and taxing authorities suffer loss.
Vengeance
Vengeance has its place in our legal system: e.g., in the criminal law and in provisions for punitive damages.
And vengeance finds its way into the law of bankruptcy in, for example, the form of a discharge denial under § 523: i.e., that’s the punishment for an individual’s less than honest behavior.
But my experience with stressed financial circumstances, whether inside or outside bankruptcy, is this:
- vengeance and financial stress don’t mix well.
Creditors often enter into a financially stressed situation with fire and fists (figuratively speaking). But as matters progress:
- the predominant question for a creditor becomes, “How much money will I get on my claim?”; and
- maximizing financial return will, for a creditor, almost always upstage the desire for vengeance.
In corporate reorganizations, maximizing return predominates for creditors over vengeance. But when individual debtors are involved, § 523 gives vengeance a higher role.
Conclusion
The difference between a living person and a corporate person is significant.
And that difference is one reason why discharge and non-dischargeability provisions in the Bankruptcy Code differ between individual and corporate debtors.
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