Bankruptcy cases differ from typical lawsuits in a variety of ways, including the parties involved. Whereas standard lawsuits generally involve a plaintiff and a defendant, bankruptcy cases have a different cast of “players,” including the debtor or debtor in possession, creditors, the bankruptcy trustee (i.e., 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’s an overview of the six key players in Chapter 7, Chapter 13 and Chapter 11 cases:
1. The Debtor
The individual or business that files a petition for bankruptcy relief is called the debtor. Individual consumers most often file for bankruptcy relief under Chapter 7, Chapter 13, or Chapter 11. Married individuals can file as joint debtors. However, if an individual debtor is married, his 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 about the non-debtor stay will be included in future blog posts. Upon successful completion of their bankruptcy cases, individuals are usually granted discharges of some or all of their debts. Individuals can file for bankruptcy on their own (i.e., pro se) or with the assistance of an attorney.
Businesses can file for bankruptcy relief under Chapter 7 or Chapter 11. Although businesses do not receive Chapter 7 discharges, filing for Chapter 7 relief can facilitate the liquidation and winding down process. In Chapter 11, businesses can restructure their debts and obtain releases precluding creditors from collecting certain debts after the bankruptcy case concludes. Businesses must be represented by counsel in bankruptcy.
Debtors file for bankruptcy to obtain relief from their creditors. Creditors are those to whom the debtor owes debts. Creditors have “claims” against debtors in bankruptcy, which represent the debts they are owed. Creditors are considered “parties in interest” in a bankruptcy case. As such, creditors have standing to raise objections to the debtors’ operations during the bankruptcy case, as well as debtors’ plans to ultimately exit 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 claims are not collateralized are unsecured creditors. In bankruptcy, secured creditors are only secured to the extent of the value of the collateral securing their claims. Any remaining amounts of a creditor’s claim above the value of a creditor’s collateral are considered unsecured. As such, secured creditors often have unsecured claims in addition to their secured claims. Under the Bankruptcy Code, secured creditors generally receive greater payment on their claims than unsecured creditors. More information about secured and unsecured claims, as well as creditors’ options 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 obtain control of debtors’ assets and take over debtors’ operations during bankruptcy cases. Every Chapter 7 case has a Chapter 7 trustee; however, a Chapter 11 trustee is only appointed upon motion when it is established that the debtor cannot continue operating on its own, most often due to the debtor’s bad faith or mismanagement of the bankruptcy estate. Chapter 7 and Chapter 11 trustees assess the debtor’s assets and determine whether they can be liquidated and distributed to creditors. Additionally, Chapter 7 and Chapter 11 trustees examine documents filed by the debtor and, as applicable, object to the debtor’s discharge. Chapter 7 and Chapter 11 trustees also review claims filed by creditors and assert objections as applicable.
- Chapter 7 Trustees
Chapter 7 trustees may seek to hire professionals, such as attorneys, accountants, or realtors, who are paid by the bankruptcy estate. Once the court approves of the employment of such professionals, the professionals are required to file fee applications, which can be reviewed and objected to by creditors and other parties in interest.
- Chapter 13 Trustees
Chapter 13 trustees similarly examine the debtor’s bankruptcy filings and can also object to the debtor’s qualifications for relief under that chapter. Additionally, Chapter 13 trustees evaluate the debtor’s Chapter 13 plan of repayment and object if the requirements of the Bankruptcy Code are not met. Once a Chapter 13 plan is confirmed, the Chapter 13 trustee will collect payments from the debtor and distribute them to various creditors in accordance with the plan.
- Chapter 11 and Subchapter V Trustees
Chapter 11’s Subchapter V was recently implemented and provides for a new type of bankruptcy trustee. Subchapter V trustees are tasked with facilitating the confirmation of a Subchapter V plan. To that end, Subchapter V trustees often work closely with debtors to draft and propose Subchapter V plans that comply with the Bankruptcy Code and are likely to be confirmed. Additionally, Subchapter V trustees can act as mediators to facilitate agreements between debtors and creditors such that the Subchapter V plan will be confirmed. These trustees frequently seek to hire professionals to assist with various issues relating to the bankruptcy estate.
4. The Debtor in Possession (DIP)
When a debtor files for relief under Chapter 7, the Chapter 7 trustee obtains control of the debtor’s assets and operational decisions. In contrast, in Chapter 13 and Chapter 11, including Subchapter V, debtors retain control over their assets and business operations. When the debtor’s assets remain under the debtor’s control, the debtor is called a debtor in possession (DIP). Under the Bankruptcy Code, the DIP has the same powers and duties as a Chapter 7 trustee. Businesses that file under Chapter 11 and Subchapter V act as DIPs and, as such, retain control of their business operations, frequently keeping their prebankruptcy management teams in place. As previously mentioned, though, if a Chapter 11 DIP is acting in bad faith or otherwise mismanaging its business, a creditor or other party with standing may file a motion seeking the appointment of a Chapter 11 trustee and removing the DIP from 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 committee members that represent the interests of all members of that committee. For instance, the UCC will be comprised of general unsecured creditors that represent the interests of most or all unsecured creditors in that Chapter 11 case. Committees can also hire professionals, such as attorneys, and can participate in the bankruptcy case by filing motions, objections, and adversary proceedings as applicable. Beyond the UCC, committees may be formed to represent any collective of similarly situated creditors, which will vary according to the specific facts of each case. However, it is common for smaller Chapter 11 cases not to have any committees at all.
6. The United States Trustee
The United States Trustee Program (USTP) is a division of the United States Department of Justice, whose role is to civilly prosecute bankruptcy fraud and abuse in civil cases, including bankruptcy cases, and to provide oversight to ensure compliance with the Bankruptcy Code and Bankruptcy Rules. In jurisdictions in which the USTP does not have an office, a bankruptcy administrator fulfills this role.
The United States Trustee (UST) is a party in standing in bankruptcy cases and, as such, the UST can participate in cases by filing motions, objections, and adversary proceedings just like creditors. However, the UST cannot file a competing Chapter 11 plan. The UST is also tasked with conducting initial debtor interviews, leading Section 341 meetings of creditors in Chapter 11 cases, and appointing committees in Chapter 11 cases. It is important to remember that the UST has a different role and duties than other bankruptcy trustees.