Chapter 11 Debtor in Possession: Business Bankruptcy

As an individual or small business owner who may be thinking about filing Chapter 11, you should take the time to learn about the various aspects of the process. As you may have learned by now, a Chapter 11 filing is most often used to reorganize a business. But it can also be useful in a sole proprietorship, a partnership, or even for an individual facing bankruptcy.

Inclusion of Personal Assets

Corporations

In a corporate Chapter 11 bankruptcy, the entity enjoys a separate identity from its members or shareholders, which is why the assets of the individual shareholders or members would not be listed in the schedules. 

Sole Proprietorships

If an individual is operating a business as a sole proprietor, meaning the individual is using a d/b/a and not utilizing a corporate entity to conduct the business, the business and personal assets will need to be listed in the schedules. 

Partnerships

In a partnership, the entity is not entirely separate and apart from its partners, which means that if an individual partner files for bankruptcy, the partners' personal assets can, in some cases, be used to pay creditors.

See "Are You Personally Liable for Business Debts?" for more on business debt liability in bankruptcy.

Main Responsibilities of the Debtor in Possession

Regardless of whether the filer is an individual or corporate entity, the debtor assumes the role of a “debtor in possession” in Chapter 11 proceedings. The Bankruptcy Code assigns fiduciary responsibilities to the debtor in possession (DIP), giving the DIP the rights and powers of a chapter 11 trustee.  11 U.S.C. §1107.   This means that the DIP must perform all the duties of a trustee outlined in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure. These duties include operating the business, accounting for property, examining and objecting to claims, and filing informational reports as mandated by the court and the U.S. trustee or bankruptcy administrator.

Other duties and powers assigned to the debtor in possession include the right, with the court's approval, to employ attorneys, accountants, appraisers, and other professional staff, as required. Such individuals may be used to help the debtor during the bankruptcy case. They may, for example, help with the filing of tax returns, or assist with any court-ordered reports after confirmation, such as a final accounting. The U.S. trustee must monitor the debtor in possession and ensure that he or she meets all the court’s reporting requirements.  The monthly reporting requirements can be quite involved, and it is best to hire an accountant who is familiar with bankruptcy filings to assist you.

Tools Available to the Debtor in Possession

Keep in mind, too, that the Chapter 11 process gives the debtor in possession several “tools” with which to restructure a small business. For example, a debtor in possession can secure financing and loans on favorable terms by assigning the new lenders first priority on the earnings of the business.

Under the court’s purview, the debtor in possession may retain the power to reject and cancel contracts. Debtors can also protect their business from other litigation by imposing an automatic stay, during which time most litigation against the debtor is put on hold, until it can be resolved in bankruptcy court.

To learn more about business bankruptcy, see our section on Bankruptcy for Small Businesses.