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Primary Participants in Bankruptcy Process

3. Who are the primary participants in the bankruptcy process?

The primary participants in the bankruptcy process are as follows:

•   Debtor – The debtor is the individual or business entity seeking or filing for bankruptcy protection.

•    Creditor – A creditor is any individual owed a debt or obligation by the debtor. Creditors may include individuals, businesses (or other entities), or holders of securities (debt or ownership interests) of a business debtor.

⁃    Note: To be included in the bankruptcy process, creditors must receive notice of the bankruptcy filing.

•  Bankruptcy Trustee (or Debtor-in-Possession) – The bankruptcy trustee is a representative elected (or appointed) to represent the interests of creditors of the bankrupt debtor. The trustee is charged with assembling the assets of the debtor’s estate and either selling those assets or administering those assets in accordance with a plan of reorganization. The trustee must meet numerous statutory qualifications, including being independent and disinterested from the debtor or creditors. The role of the trustee varies a bit between personal and business bankruptcies and liquidation and reorganization bankruptcies.

⁃    Note: In Chapter 7 liquidation cases, the creditors may elect the trustee. In Chapter 13 reorganization cases, the US Attorney General may appoint a standing trustee to represent all creditors in the Chapter 13 case.

⁃    Personal & Business Liquidation Bankruptcy – The trustee automatically takes control over the debtor’s estate, liquidates the non-exempt assets, and distributes the proceeds to creditors. This process is the same in a personal and business liquidation.

⁃    Personal Reorganization Bankruptcy – The trustee accounts for all of the assets of the debtor, assists in the development of a plan of reorganizations, and administers an approved plan for the reorganization of debts and payment of creditors.

⁃   Business Reorganization Bankruptcy – Generally, a business debtor remains in possession of the assets of the bankruptcy estate. The debtor is known as a “debtor-in-possession” (DIP). The DIP serves the same function as the trustee but manages its assets and operations in accordance with the rules laid out by bankruptcy law. In this case, a trustee is only appointed when creditors of the estate petition the court to do so in an attempt to protect their interests. This normally happens when the debtor-in-possession fails to act in accordance with bankruptcy law or fails to otherwise adequately protect the interests of creditors.

•    Bankruptcy Court – The bankruptcy court is a federal court charged with administering the bankruptcy process. Much of the bankruptcy process is handled by the trustee or debtor-in-possession. The court generally steps in to review and approve liquidations and plans of reorganization, grant discharges of indebtedness, and adjudicate disputes between or among debtors and creditors.

The role of each of these participants is discussed separately.

•    Discussion: Do you think the bankruptcy process protects the rights of debtor and creditors? Why or why not? Why do you think the role of the trustee is varied between business and personal reorganizations?

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