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LJN NewslettersNewsSectionsThe Bankruptcy Strategist

Exceptions to Dischargeability

BY Chester B. Salomon
August 15, 2003

For many years, financial or securities executives knew that if they had not committed a fraud or had not been fined by the Securities and Exchange Commission (SEC), they could get a discharge in bankruptcy by filing for Chapter 7 or 11. Negligently committing a securities violation would not preclude a bankruptcy discharge for the civil liability flowing therefrom.

The Sarbanes-Oxley Act of 2002 is commonly known for its sweeping reforms to combat corporate and accounting fraud, to establish a new accounting oversight board, and to impose new penalties and a variety of higher standards of corporate governance. Lesser known are the Act's draconian amendments that change bankruptcy law to deny dischargeability of debts incurred by reason of securities laws violations.

The new exception to dischargeability under Section 523(a)(19) of the Bankruptcy Code came suddenly as Congress and the media piled-on against aggressive public companies, their chief executives and chief financial officers, the public accounting profession and the securities industry in the aftermath of bankruptcy filings by Enron, Global Crossing, WorldCom and other spectacular corporate collapses. But what are the consequences of the hasty discharge legislation? For financial executives and Wall Streeters, the consequences surely are not positive. Yet there may be an escape from the latest Congressional broadside.

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