Corporate Officer Liability in Bankruptcy

Start with what the company’s filing did not do. In the two chapters a trade creditor meets most often, it did not discharge the corporate debt at all. 11 U.S.C. § 727(a)(1) directs that the court “shall grant the debtor a discharge,” subject to a list of exceptions whose first paragraph is “the debtor is not an individual” – so a corporation in Chapter 7 never receives one; it simply runs out of assets. And 11 U.S.C. § 1141(d)(3) denies a Chapter 11 discharge where the plan liquidates substantially all the estate, the debtor stops doing business afterward, and the debtor would have been denied a discharge under § 727(a) – all three together. A corporation that genuinely reorganizes and keeps trading is discharged on confirmation; the two that a trade creditor usually encounters are not. The obligation survives the case. What ends is the company’s ability to pay it – a different problem, and not always a permanent one. An undischarged debt does not lapse merely because an entity stopped filing its reports, and where the same principals resume the same trade through a new company, the question of who carries the old liability stays open. How long a judgment lives, whether it can be renewed, and how long claims survive against a dissolved corporation are all matters of state law and vary widely, so whether a stale corporate debt is worth pursuing is a question for counsel. It is simply not a question the bankruptcy closed.

The limited-liability shield is real, but it is not absolute, and a bankruptcy filing by the company does not extend the shield to the individuals behind it. The most common exposure is the simplest: a personal guarantee. If an officer or owner personally guaranteed a lease, a line of credit, or a supplier account, the corporate bankruptcy does nothing to that promise – the creditor’s claim against the individual is unaffected, and the individual remains directly liable on the full balance. That route has enough of its own procedure to warrant a separate treatment; see enforcing a personal guarantee after a business bankruptcy.

The second path is trust-fund taxes. When a business withholds income and payroll taxes from employee wages, that money is held in trust for the government. That is not a metaphor: 26 U.S.C. § 7501(a) provides that the amount collected or withheld “shall be held to be a special fund in trust for the United States.” If it is not paid over, 26 U.S.C. § 6672(a) makes “any person required to collect, truthfully account for, and pay over” the tax, who “willfully fails” to do so, personally liable for a penalty equal to the whole amount – in practice, the officers with check-signing authority. Two points of precision are worth carrying: the familiar labels “Trust Fund Recovery Penalty” and “responsible person” are IRS administrative and case-law usage rather than statutory words, so the operative test is the language just quoted; and § 6672(b)(1) bars the penalty unless the Secretary first notifies the taxpayer in writing – subject to § 6672(b)(4), which lifts that precondition where collection is in jeopardy. Note also why the corporate bankruptcy leaves this standing: not because of any bankruptcy carve-out, but because it is a separate liability of a different person, which the company’s case never touched.

Why these two exposures are officer-shaped

Trust-fund liability follows the job rather than the shareholding. It attaches to whoever was required to collect and pay over the tax, which in practice means check-signing authority – a non-owner finance officer can carry it, and a passive shareholder generally cannot.

The insider clawback works the same way. Officers are statutory insiders, so under 11 U.S.C. § 547(b)(4)(B) payments made to them are reachable for a full year before the filing, rather than the ninety days that applies to an ordinary trade creditor. The longer window is not simply the same case stretched out: § 547(f) presumes the debtor insolvent only during the ninety days immediately before filing, and § 547(g) leaves the trustee to prove the elements of subsection (b). Past ninety days insolvency must be established rather than assumed – a harder case over a window four times as long. What sits in that final year is usually salary increases, bonuses, repayment of officer loans, and equipment or vehicles retitled out of the company, and it is a matter of record.

The paths that reach individuals generally, and the one that follows the assets

Veil-piercing runs the other way. It is state law rather than federal, and while it does ask how a particular individual dominated and used the entity, it starts from how the entity itself was run – and the tests are not uniform across entity forms. California and Washington, among others, direct in their LLC acts that a member’s failure to hold meetings, or to observe the formalities of calling and conducting them, is not in itself a ground for personal liability – provided the operating agreement or articles do not require those meetings. A corporation’s disregard of its own formalities, by contrast, is one of the classic factors weighed against it. So the analysis does not transfer between entity forms as neatly as it looks; the LLC-side counterpart is LLC member liability after a business bankruptcy.

The fifth path is the fraudulent conveyance, and it is the one least tied to any job title. Under 11 U.S.C. § 548(a)(1) a transfer made within two years before the petition can be avoided either where the debtor acted with actual intent to hinder, delay or defraud a creditor, or where the debtor received less than reasonably equivalent value while insolvent – or became insolvent as a result. The two windows do different work. Section 547 runs one year for an insider and turns on whether a payment on an existing debt let that creditor do better than it would have in a liquidation; § 548 runs two years and turns instead on intent, or on whether the debtor received reasonably equivalent value in exchange. Neither is a formality – each has its own elements for the trustee to establish. The practical point for a creditor is only this: a transfer can fall outside the preference window and still be reachable as a fraudulent conveyance.

Because § 548 follows the property rather than the person, it can land somewhere other than the officer: a spouse, an adult child, a trust, or a successor company that took the equipment and the customer list and kept trading. That is also why it is the path most dependent on records research – the transfer is documented in a deed, a title, a UCC filing or a corporate registration, and it is usually documented in someone else’s name. Either way, what the individuals did with corporate value is where an independent asset investigation, the same groundwork behind post-judgment discovery, earns its keep.