Bradley’s Bankruptcy Basics: The 6 Key “Players” in Bankruptcy Cases | Bradley Arant Boult Cummings LLP
Bankruptcy cases differ from typical lawsuits in a number of ways, including the parties involved. While standard lawsuits generally involve a plaintiff and a defendant, bankruptcy cases have a different group of “players” including the debtor or debtor in possession, creditors, trustee in bankruptcy (i.e. say Chapter 7 Trustee, Chapter 13 Trustee, etc.), Committees and the United States Trustee. Often, these players will retain attorneys to represent their interests in bankruptcy cases. Understanding the roles of each of these players will help you navigate the bankruptcy system.
Here is an overview of the six key players in Chapter 7, Chapter 13 and Chapter 11 cases:
1. The debtor
The person or business who files for bankruptcy relief is called the debtor. Individual consumers most often file a claim for legal redress under Chapter 7, Chapter 13 or Chapter 11. Married people can file a claim as joint and several debtors. However, if an individual debtor is married, his or her spouse is not required to also file for bankruptcy. Even if a debtor’s spouse does not file for bankruptcy, the automatic stay can sometimes extend to the non-filing spouse as well. More information on the non-debtor stay will be included in future blog posts. Once their bankruptcy cases are successfully completed, people are generally released from all or part of their debts. Individuals can declare bankruptcy themselves (ie. pro se) or with the assistance of a lawyer.
Businesses can file a Chapter 7 or Chapter 11 adjustment request. Although businesses do not receive a Chapter 7 discharge, filing the Chapter 7 adjustment request can facilitate the liquidation and liquidation process. . In Chapter 11, companies can restructure their debts and obtain discharges prohibiting creditors from collecting certain debts after the bankruptcy case is over. Companies must be represented by a lawyer in the event of bankruptcy.
Debtors file for bankruptcy to seek redress from their creditors. Creditors are those to whom the debtor has debts. Creditors have “claims” against bankrupt debtors, which represent debts owed to them. Creditors are considered “interested parties” in a bankruptcy case. As such, creditors have standing to raise objections to debtors ‘operations during the bankruptcy case, as well as debtors’ plans to eventually come out of bankruptcy.
- Secured and unsecured creditors
Creditors can be “secured” or “unsecured”. Creditors who have collateral protecting their claims are called secured creditors, and creditors whose debts are unsecured are unsecured creditors. In the event of bankruptcy, secured creditors are only secured up to the value of the collateral securing their claims. Any amounts remaining of a creditor’s claim above the value of a creditor’s collateral are considered unsecured. As such, secured creditors often have unsecured debts in addition to their secured debts. Under the Bankruptcy Code, secured creditors generally receive a higher payment on their claims than unsecured creditors. More information on secured and unsecured debt, as well as options for creditors to participate in and affect the outcome of the bankruptcy case, will be detailed in future blog posts.
3. Bankruptcy trustees
Chapter 7 trustees and Chapter 11 trustees gain control of debtors ‘assets and take over debtors’ operations during bankruptcy cases. Each Chapter 7 case has a Chapter 7 Trustee; however, a Chapter 11 trustee is only appointed on motion when it is established that the debtor cannot continue to operate on his own, most often due to the debtor’s bad faith or mismanagement of the assets. of bankruptcy. The Chapter 7 and 11 trustees assess the debtor’s assets and determine whether they can be liquidated and distributed to creditors. In addition, the trustees of chapters 7 and 11 examine the documents filed by the debtor and, if necessary, oppose the discharge of the debtor. Chapter 7 and 11 trustees also review claims filed by creditors and raise objections, if any.
- Chapter 7 Trustees
Chapter 7 trustees may seek to hire professionals, such as lawyers, accountants or real estate agents, who are paid by the bankruptcy estate. Once the court approves the employment of these professionals, the professionals are required to file fee claims, which can be reviewed and challenged by creditors and other interested parties.
- Chapter 13 Trustees
Chapter 13 trustees similarly review debtor bankruptcy filings and may also object to the debtor’s qualifications for relief under this chapter. Additionally, Chapter 13 Trustees assess the debtor’s Chapter 13 repayment plan and object if Bankruptcy Code requirements are not met. Once a Chapter 13 plan is confirmed, the Chapter 13 Trustee will collect payments from the debtor and distribute them to the various creditors in accordance with the plan.
- Chapter 11 and subchapter V Trustees
Subchapter V of Chapter 11 has recently been implemented and provides for a new type of trustee in bankruptcy. Subchapter V trustees are responsible for facilitating the confirmation of a Subchapter V plan. To this end, Subchapter V trustees often work closely with debtors to draft and propose subchapter plans. -chapter V compliant with the Bankruptcy Code and likely to be confirmed. In addition, subchapter V trustees can act as mediators to facilitate agreements between debtors and creditors so that the subchapter V plan is upheld. These trustees frequently seek to hire professionals to help them resolve various issues related to the bankruptcy estate.
4. Debtor in possession (DIP)
When a debtor seeks relief under Chapter 7, the Chapter 7 trustee obtains control of the debtor’s assets and operational decisions. In contrast, in chapters 13 and 11, including subchapter V, debtors retain control over their assets and business operations. When the assets of the debtor remain under the control of the debtor, the debtor is called debtor in possession (DIP). Under the Bankruptcy Code, the DIP has the same powers and duties as a Chapter 7 trustee. Undertakings which file under Chapter 11 and Subchapter V act as a DIP and, as such, retain control of their business operations, frequently keeping their pre-bankruptcy management teams in place. As previously mentioned, however, if a Chapter 11 PID acts in bad faith or mismanages its affairs, a creditor or other party with standing may file a motion requesting the appointment of a Chapter 11 trustee and the removal of the DIP control.
Committees may be appointed in Chapter 11 cases. The most common committee is the Unsecured Creditors Committee (UCC). Committees are made up of a handful of members who represent the interests of all members of that committee. For example, the UCC will be made up of general unsecured creditors who represent the interests of most or all of the unsecured creditors in this Chapter 11 matter. Committees may also hire professionals, such as lawyers, and may participate in the case. bankruptcy by filing conflicting motions, objections and proceedings, if applicable. Beyond the UCC, committees may be formed to represent any collective of creditors in a similar situation, which will vary depending on the specific facts of each case. However, it is common for small matters falling under Chapter 11 to have no committee.
6. The administrator of the United States
The United States Trustee Program (USTP) is a division of the United States Department of Justice whose role is to prosecute bankruptcy fraud and abuse in civil matters, including bankruptcy cases, and provide oversight to ensure Bankruptcy Code compliance and bankruptcy. Rules. In jurisdictions where the USTP does not have an office, a bankruptcy administrator fulfills this role.
The United States Trustee (UST) is involved in bankruptcy cases and as such the UST can participate in cases by filing conflicting petitions, objections and proceedings just like creditors. However, UST cannot file a competing Chapter 11 plan. UST is also responsible for conducting initial debtor interviews, conducting Section 341 creditors meetings in Chapter 11 cases. and appointing committees in Chapter 11 matters. It is important to remember that the UST has a different role and duties than other bankruptcy trustees.