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Common Concerns & Questions About Bankruptcy

What are the duties of a debtor in possession in Chapter 11?

| Oct 23, 2014 | Chapter 11 |

Business owners in Texas may know that when a sole proprietorship, partnership or a corporation faces extreme debts, one of the options available to them is to file for bankruptcy. When they want to reorganize their business, they mostly choose to file for bankruptcy under Chapter 11.

A corporation, which is owned by the shareholders, is separate and distinct from these shareholders. When such corporation files for Chapter 11 bankruptcy, the personal assets of the shareholders are not at risk except for the value of their investments in the stock of the company.

However, a sole proprietorship does not have a separate and distinct identity apart from its owners, so when a sole proprietorship files for bankruptcy it does involve their personal assets as well.

When a partnership files for bankruptcy, the personal assets of the partners, in certain cases, can be used to pay the creditors and the partners themselves may have to file for bankruptcy protection.

Under Section 1107 of the Bankruptcy Code, the debtor in possession is placed in the position of a fiduciary. The rights and powers of the trustee, except investigative functions and duties, are given to the debtor. The Bankruptcy Code and Federal Rules of Bankruptcy Procedure state that the duties to be performed by the debtor in possession include probing and objecting to claims, accounting for property and filing informational claims including monthly operating reports.

The law also gives various other powers to the debtor in possession. These include employing appraisers, attorneys, auctioneers or other professionals for assistance in the bankruptcy case. However, the approval of the court is required before employing their services. The debtor also has to file tax returns and reports that are ordered by the court or are necessary, including final accounting. It is the U.S. trustee’s duty to ensure that the debtor in possession complies with the reporting requirements.

Source: United States Courts, “Reorganization Under the Bankruptcy Code,” Accessed on Oct. 16, 2014