Nondischargeable Business Debts: 7 Categories Under §523 That Follow the Owner

A company can close in chapter 7 and still leave its owner holding debts that no discharge will reach. Section 523 of the Bankruptcy Code speaks only to "an individual debtor," so its list does its work when the person behind the business files, and it is the owner, not the entity, who learns which obligations were drafted to survive.

The entity's own position is different and, for most small companies, bleaker. An LLC or corporation in chapter 7 receives no discharge at all, because section 727 grants one only to individuals, and a corporation confirming a traditional chapter 11 plan answers to the narrower exceptions in section 1141(d)(6). Subchapter V is where the line blurs: the Fourth and Fifth Circuits have held that a corporate debtor confirmed without creditor consent is subject to the section 523(a) list, and other courts have disagreed. The seven categories below are the ones that attach to owners of operating businesses. The statute contains others (student loans, support obligations, intoxicated driving) that belong to a different conversation.

1. Withheld Taxes Travel With Whoever Controlled the Checkbook

Section 523(a)(1)(A) excepts taxes "of the kind and for the periods specified in section 507(a)(3) or 507(a)(8)," and section 507(a)(8)(C) names "a tax required to be collected or withheld and for which the debtor is liable in whatever capacity." The last three words carry the category. An owner who never owed the tax as a taxpayer can owe it as the person who failed to pay it over.

That personal liability comes from 26 U.S.C. 6672, the trust fund recovery penalty, which reaches a "responsible person" who willfully fails to remit withheld income and employment taxes. The IRS explanation of the penalty defines willfulness without any evil motive: plain indifference to the requirement is enough, and paying other bills first is the example the agency gives. The employer's own matching share is a separate obligation of the company and sits outside the penalty.

In 1978, under the former Bankruptcy Act, the Supreme Court held in United States v. Sotelo that an officer's liability for withheld taxes, though labeled a penalty, could not be discharged. The current Code reaches the same place by the route described above, and the company's own bankruptcy leaves the individual's exposure where it was.

The withheld dollars behave like coats left at the check room of a restaurant that has since lost its lease: they were never the restaurant's to spend, and the attendant who lent them out is the one the owners come to find. Two further tax paragraphs sit beside this one. Section 523(a)(1)(B) preserves taxes for which a required return was never filed, or was filed late and within two years before the petition, and (a)(1)(C) preserves any tax for which the debtor filed a fraudulent return or "willfully attempted in any manner to evade or defeat" it.

2. Money Obtained by Misrepresentation Remains Owed, Even to the Partner Who Said Nothing

Section 523(a)(2)(A) excepts debts for money or credit obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." The creditor need not prove that its reliance was reasonable. In Field v. Mans (1995) the Supreme Court set the standard at justifiable reliance, which asks what this creditor could fairly believe rather than what a prudent lender would have checked.

The harder rule for co-owners arrived in 2023. In Bartenwerfer v. Buckley, a wife who had remained largely uninvolved in a house renovation could not discharge the judgment arising from defects her husband failed to disclose, because the paragraph turns on how the money was obtained, "regardless of her own culpability." The Court read the passive voice as removing the actor altogether. Whether a given co-owner was in fact liable for the other's fraud is a state-law question the bankruptcy court takes as it finds it.

3. The Written Financial Statement Carries Four Elements

Statements about financial condition have their own paragraph, and it is stricter. Section 523(a)(2)(B) requires a statement in writing "(i) that is materially false; (ii) respecting the debtor's or an insider's financial condition; (iii) on which the creditor ... reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive." Each element is the creditor's to prove, by a preponderance of the evidence under Grogan v. Garner (1991).

The scope of "financial condition" was settled in Lamar, Archer & Cofrin, LLP v. Appling (2018): a statement about a single asset qualifies. Appling's assurances about an expected tax refund were spoken rather than written, and so could not carry the claim under (a)(2)(B), while (a)(2)(A) excludes financial statements by its terms.

For a business owner the writings that matter are the funding application, the bank statements attached to it, and any balance sheet a lender requested. A funder's own file may undercut the reliance element when its underwriting contradicted the statement, though how that argument fares depends on facts no statute supplies.

4. Defalcation Requires a Culpable State of Mind

Section 523(a)(4) excepts debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." In Bullock v. BankChampaign (2013) the Court held that defalcation requires "knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior." A careless trustee of someone else's money is not, on that reading, enough.

5. An Injury Must Be Intended, Not Merely Caused

Section 523(a)(6) excepts debts "for willful and malicious injury by the debtor to another entity or to the property of another entity." Kawaauhau v. Geiger (1998) confined it to a "deliberate or intentional injury, not merely ... a deliberate or intentional act that leads to injury," and left negligent or reckless harm dischargeable.

The business version of this claim tends to involve collateral. An owner who sells equipment subject to a lender's lien and spends the proceeds has done something deliberate; whether the injury to the lender was intended is the question the complaint must answer, and it is a question of evidence rather than of labels.

The chapter matters here more than the owner may expect.

The completion discharge in chapter 13, section 1328(a), omits paragraph (6) from its list of exceptions and preserves only civil awards for willful or malicious injury that caused personal injury or death, so an owner who completes a chapter 13 plan stands differently toward a conversion claim than one who received a chapter 7 discharge.

6. Government Fines and Penalties Stay Behind

Section 523(a)(7) excepts a "fine, penalty, or forfeiture payable to and for the benefit of a governmental unit" that "is not compensation for actual pecuniary loss." Tax penalties follow narrower rules within the same paragraph. A licensing fine assessed against an owner personally is one familiar instance.

7. The Creditor Nobody Listed Keeps Its Claim

Section 523(a)(3) preserves a debt "neither listed nor scheduled" in time for the creditor to file a claim, unless that creditor "had notice or actual knowledge of the case" in time. The category is created entirely by paperwork. A funder left off the schedules because the owner regarded its claim as disputed, or a guaranty forgotten in a drawer, can outlast the discharge that was meant to end it.

The omission also disturbs the procedure that governs categories two through five. Under section 523(c), debts of the fraud, fiduciary and injury kinds are discharged unless the creditor asks the court to except them, and Bankruptcy Rule 4007(c) requires that complaint "within 60 days after the first date set for the §341(a) meeting of creditors," with extensions only on a motion filed before the time runs. A creditor who never received notice was never on that clock.

Four of the seven categories require a creditor to sue before a deadline. The other three require nothing at all.

Subchapter V adds a final wrinkle for the company itself. In the Fifth Circuit's 2024 GFS Industries opinion, a merchant cash advance funder was permitted to pursue a section 523(a) claim against an LLC that had represented it did not anticipate bankruptcy and filed two weeks later, a ruling that holds only where a plan is confirmed without consent and only in circuits that follow it.

Where Settlement Fits, and Where It Stops

Delancey Street is a business debt settlement company, not a law firm, and it neither files bankruptcy cases nor answers adversary complaints. What it offers is a free, confidential review of merchant cash advance, SBA and stacked business debt, and negotiation of those balances outside court, which an owner may want to weigh before or alongside a meeting with bankruptcy counsel; its approach is described at delanceystreet.com. Several categories on this list are beyond any settlement company. Trust fund liability is a matter between the owner and the IRS, and a funder's fraud complaint in a pending case belongs to a bankruptcy lawyer.

The exceptions were written for particular conduct and particular creditors, and most of them wait for someone to invoke them. The discharge is a promise with conditions attached, and the conditions were printed long before anyone signed.