Chapter 11 Bankruptcy

Bankruptcy protects consumers against lawsuit from creditors and provides debt relief for the honest debtor. Chapter 11 Bankruptcy generally provides for reorganization of a business's debt, although individuals can also seek debt relief under chapter 11. This chapter is typically referred to as a "reorganization" bankruptcy and provides a fresh start for those in business. A chap 11 BK debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time.

How Chapter 11 Affects Different Types of Businesses
A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock. A sole proprietorship (owner as debtor), on the other hand, does not have an identity separate and distinct from its owner(s). So a chapter 11 would include both the business and personal assets of the debtor. Like a corporation, a partnership exists separate and apart from its partners. However, the partners' personal assets may, in some cases, be used to pay creditors in the bankruptcy case. Or the partners, themselves, may be forced to file for bankruptcy protection.

How Chapter 11 Differs from Other Bankruptcies
Like chapter 7 and 13 debtors, the chapter 11 debtor has to undergo mandatory credit counseling before filing and mandatory personal financial management counseling near the end of the case. And, like chapter 7 and 13, chapter 11 impairs credit for 7 to 10 years. The major difference between chapter 11 and other bankruptcy chapters is that many functions of the U.S. trustee are passed to the debtor in possession. The U.S. trustee mainly monitors and supervises the chapter 11 proceedings.

Section 1107 of the Bankruptcy Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a chapter 11 trustee. It requires the debtor to perform of all but the investigative functions and duties of a trustee. These duties include accounting for property, examining and objecting to claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator, such as monthly operating reports. 11 U.S.C. §§ 1106, 1107; Fed. R. Bankr. P. 2015(a).

The debtor in possession also has many of the other powers and duties of a trustee, including the right, with the court's approval, to employ attorneys, accountants, appraisers, auctioneers, or other professional persons to assist the debtor during its bankruptcy case. Other responsibilities include filing tax returns and reports which are either necessary or ordered by the court after confirmation, such as a final accounting. The U.S. trustee is responsible for monitoring the compliance of the debtor in possession with the reporting requirements, monitoring the progress of a chapter 11 case and supervising its administration.

The U.S. trustee is responsible for monitoring the debtor in possession's operation of the business and the submission of operating reports and fees. Additionally, the U.S. trustee monitors applications for compensation and reimbursement by professionals, plans and disclosure statements filed with the court, and creditors' committees. The U.S. trustee conducts a meeting of the creditors, often referred to as the "section 341 meeting," in a chapter 11 case.

The U.S. trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, establishing new bank accounts, and paying current employee withholding and other taxes. By law, the debtor in possession must pay a quarterly fee to the U.S. trustee for each quarter of a year until the case is converted or dismissed. 28 U.S.C. § 1930(a)(6). Should a debtor in possession fail to comply with the reporting requirements of the U.S. trustee or orders of the bankruptcy court, or fail to take the appropriate steps to bring the case to confirmation, the U.S. trustee may file a motion with the court to have the debtor's chapter 11 case converted to another chapter of the Bankruptcy Code or to have the case dismissed.