There are 4 major participants in any bankruptcy case: debtor, creditors, trustee, and bankruptcy judge. The purpose of bankruptcy is to give the debtor a fresh start and to pay its unsecured creditors a pro rata portion of whatever the law allows in a bankruptcy case. When a bankruptcy case commences, the property of the debtor as of the commencement becomes the bankruptcy estate and may include postpetition income and acquired property, depending on the bankruptcy chapter. The creditors file a claim against the bankruptcy estate so that they will be paid whatever will be available. The trustee oversees the entire process, investigating the debtor to verify the information provided in the bankruptcy petition, receiving the list of allowed claims filed by creditors, and using property in the bankruptcy estate to pay the expenses of bankruptcy as well as the creditors. The bankruptcy judge resolves any conflicts between the other participants.
The debtor is, of course, one who owes a debt to a creditor. A bankruptcy case is commenced — usually voluntarily, but sometimes involuntarily — because the debtor cannot repay its debts.
A debtor is most often an individual, but it can also be a partnership, corporation, or municipality. The requirements of being a debtor in bankruptcy are defined in §109 of the Bankruptcy Code.
In most cases, the debtor files the bankruptcy petition and must attend a creditors' meeting, so that the debtor can be interviewed under oath by the trustee and by creditors who are present at the meeting. The debtor must also supply any additional information or comply with other requests by the trustee.
If the debtor does not cooperate with the bankruptcy case, then the case will be dismissed.
A creditor is one who has a claim, which is a right to payment, for a debt against the debtor. Under bankruptcy, a creditor is one who has an allowable claim when the bankruptcy petition is filed, although there are some exceptions to allow the debtor to obtain postpetition credit, which may be necessary for a business to operate.
Section 101(5) states that the term claim means:
- (A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
- (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
Impaired creditors are creditors who are not being paid the full value of their claim or whose contractual rights are being modified. Debtors of Chapters 11, 12, and 13 must submit a payment plan to the court for approval to complete their bankruptcy. Impaired creditors have higher standing to object to the debtor's payment plan, since they are suffering losses.
Under Chapter 11, only impaired creditors, who constitute the creditors' committee, can vote on the debtor's payment plan for approval. Additional duties of the committee include hiring professionals, such as attorneys and accountants, to investigate the conduct, assets and liabilities, and the financial condition of the debtor, and the committee can submit their own payment plan for the debtor, if the debtor fails to submit a payment plan or get one approved within the required time.
A bankruptcy judge acts as judge in a bankruptcy court, conducting hearings to resolve conflicts and ruling on motions. Because there are many more cases of bankruptcy than any other type of court proceedings, bankruptcy has been reduced to a streamlined set of procedures that move with regularity, and that rarely requires any more than the minimal involvement of the judge.
Before 1973, bankruptcy judges were known as referees who also administered the case, much as a trustee does today. Many critics argued that this impaired the impartiality of the judge. As case filings increased over the years, Congress decided to create a trustee system, where trustees would serve to administer the case, greatly reducing the workload for the judge, while also preserving the judges' impartiality. Nowadays, debtors in bankruptcy may only see the judge once or not at all.
Bankruptcy judges are not Article III judges — as defined in Article III of the U.S. Constitution— with lifetime appointments and salary guarantees, but are appointed to 14 year terms by the Court of Appeals for the circuit. While this sounds like a technical detail, it has broad implications on how the bankruptcy court actually functions, limits what bankruptcy judges may do, and how appeals are handled.
Because bankruptcy judges are not Article III judges, bankruptcy courts operate as adjuncts to district courts, although all district courts have standing orders to refer all bankruptcy cases to the bankruptcy court in their district.
One prime consequence of the bankruptcy judges' non-Article III status is that there is a distinction between core proceedings and non-core proceedings. Core proceedings are the most common types of proceedings in bankruptcy in which the bankruptcy judge can issue a final order that is only reviewable upon appeal; non-core proceedings commonly involve peripheral issues outside of bankruptcy law where the bankruptcy judge must submit findings of fact and proposed conclusions of law to the district court overseeing it, who will then review the submission and issue a final order.
Many aspects of bankruptcy law could be simplified and some of its uncertainties could be eliminated if bankruptcy judges were made Article III judges, but special interests, including lobbying of the Senate by the Judicial Conference of the United States who didn't want the number of Article III judges expanded (presumably because it would diminish the status of the current Article III judges), has prevented it.
The United States Trustee office was created by the Bankruptcy Act of 1978 as a pilot program and made permanent by 1986 amendments. The U.S. Trustee office is a division of the Department of Justice, and they are appointed and supervised by the office of the U.S. Attorney General. The Executive Office for United States Trustees supervises the U.S. Trustees serving in the 21 individual districts that serve specific geographical areas of the United States.
The United States Trustee serves as the top administrator in how bankruptcy cases are administered by the case and standing trustees under its supervision in most of the United States. In Alabama and North Carolina, bankruptcy cases are administered by the Bankruptcy Administrator who oversees the cases in those states.
The U.S. Trustee:
- appoints and supervises case and standing trustees that administer individual cases;
- collects statistics on bankruptcy;
- ensures that reports are filed and fees are paid;
- conducts detailed audits on 1 out of every 250 cases as mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA);
- audits cases where fraud is suspected.
The United States Trustee also has expanded duties and responsibilities under Chapter 11, which are detailed in Chapter 11 Bankruptcy Overview.
Case and Standing Trustees
Trustees are fiduciary representatives of the bankruptcy estate who are the main overseers of the debtor and who use the assets of the bankruptcy estate to pay the administrative costs of the bankruptcy and the debtor's unsecured creditors. The trustee receives part of the bankruptcy filing fee as compensation and is also paid out of the bankruptcy estate, according to a sliding commission rate based on the amount paid to creditors.
The trustee investigates the debtor to ensure that the bankruptcy petition contains complete, truthful information, and also conducts the creditors' meeting (aka 341 meeting) where the debtor is interviewed under oath by the trustee and by any creditors present at the meeting.
The trustee also has avoidance powers that allow her to strip liens from the debtor's property that were not properly registered or perfected, thereby freeing the property to use to pay unsecured creditors. Sometimes the debtor will try to protect property through a fraudulent conveyance, where the debtor transfers the property to family members or friends, or the debtor may make extra payments to preferred creditors before filing for bankruptcy. The trustee can reverse these fraudulent conveyances or preference payments, returning the property from the transferees back to the bankruptcy estate.
Under Chapter 7, a case trustee is usually appointed by the United States Trustee, although creditors do have a right, rarely exercised, to elect a trustee. Because Chapter 7 is a liquidation, the case trustee takes nonexempt, valuable property in the bankruptcy estate and sells it for the benefit of unsecured creditors.
Under Chapter 13 and 12, a standing trustee is appointed by the U.S. Trustee for an entire judicial district. Because debtors under these chapters can keep their property by paying some of their future income over a 3 or 5 year period, the standing trustee does not liquidate any property of the estate, but receives periodic payments from the debtor that is paid, after subtracting the typical trustee's commission of 10%, to the debtor's creditors.
There may be other participants in the bankruptcy case, including: contractors to an executory contract or unexpired lease; sureties and other co-obligors or business bankruptcies, other parties that may be concerned about the case including equity holders of a corporation and the Securities and Exchange Commission. Debtors also have their own debtors, which therefore become debtors of the bankruptcy estate.
Chapter 11 Participants: Debtor in Possession, Creditor Committees, and Examiners
Under Chapter 11, most debtors are business entities — often large, complex businesses who hire professionals such as attorneys and accountants to conduct their cases. Because of the complexity of these businesses, a trustee is usually not appointed, except for cause. §1104 Instead, the debtor assumes the trustee's duties in managing the case as a debtor in possession and the creditors' and equity committees, and sometimes examiners appointed by the U.S. Trustee, investigate and provide oversight of the debtor. For more detailed information, see Debtor In Possession (DIP).