The Trustee and the Corporation, Sole Proprietor, and Partnership Debtor

Chapter 11 bankruptcy is often also referred to as “reorganization” bankruptcy.

Both individuals and businesses are given an opportunity to reorganize under Chapter 11 of the United States Bankruptcy Code in order to repay creditors and have some debt eliminated, or discharged. More often than not, it will be corporations, sole proprietorships, or partnerships that file for bankruptcy under Chapter 11 of the United States Bankruptcy Code, rather than individual debtors.

The Chapter 11 Bankruptcy Trustee

The bankruptcy trustee plays a major role in all types of bankruptcy cases, including cases filed under Chapter 11. Generally, the duties of the U.S. Trustee in a Chapter 11 bankruptcy case are set forth in 28 U.S.C. § 586. They include the following:

  • Reviewing the debtor’s requests for emergency orders early in a bankruptcy case, and ensuring that the requested relief is tailored to the circumstances.
  • Determining what official committees should be established to serve in the case; appointing committee members; and engaging in oversight of committee actions.
  • Reviewing reorganization plans and disclosure statements filed by parties in the case to make sure they provide adequate and accurate information.
  • Ensuring that all required reports, schedules, and fees are timely filed, and that the debtor manages money and assets consistent with the Bankruptcy Code and with its fiduciary duty to creditors.
  • Taking action to prevent undue delay by, for example, filing a motion to dismiss the case, to convert the case to a Chapter 7 liquidation, or to appoint a Chapter 11 trustee.
  • Reviewing and, if appropriate, objecting to applications filed by professionals seeking employment in the case, payment of compensation, and/or reimbursement of expenses.
  • Investigating criminal, fraudulent, or abusive conduct for possible civil or criminal prosecution.

The Corporation Debtor

A corporation is a separate entity than its owners or shareholders. When a corporation files a bankruptcy petition under Chapter 11 of the bankruptcy code, the corporation is not putting the assets of the individuals behind the corporation at risk of loss. The exception to this rule is that the value of the investments in the company’s stock made by the individuals behind the corporation may be at risk.

The Sole Proprietorship Debtor

A sole proprietorship, on the other hand, is a much different entity than a corporation. A sole proprietorship is not a separate entity from the owner behind the sole proprietorship. Therefore, in a Chapter 11 bankruptcy proceeding, the assets of both the sole proprietorship and the owner behind the sole proprietorship are at stake. Normally a sole proprietor will file personal bankruptcy using Chapter 7 or Chapter 13.

The Partnership Debtor

A partnership is a separate entity than its partners, but a partner’s personal assets may be at risk in a Chapter 11 bankruptcy proceeding. Normally a partner will file personal bankruptcy using Chapter 7 or Chapter 13. Of course, the other partner is still liable (on the hook) for the partnership’s debts even though the partner filing for bankruptcy is no longer liable.