Managing the Business During Chapter 11: Reporting and Other Requirements

When a business files Chapter 11, it becomes a “debtor-in-possession” of its own affairs as a fiduciary to the bankruptcy estate. What this means is that management of the business during the Chapter 11 case will remain under the control of its prepetition management and principals, subject to certain duties to report and maintain the business in a manner consistent with the procedural rules of Chapter 11 business reorganization bankruptcy. While these mostly financial and administrative requirements for operating the business during Chapter 11 are relatively straight-forward and generally represent good business practices, failure to follow these requirements can result in an appointment of a trustee to takeover operations of the business or dismissal or conversion of the case to liquidation.

While the business is in Chapter 11 bankruptcy, it has an obligation to file both a comprehensive initial financial report as well as ongoing monthly operating reports. The monthly operating reports provide an itemization of cash receipts and disbursements, profit and loss statement, balance sheet, copies of all bank account statements and other financial information that facilitates an ongoing review of the debtor’s finances while it is in bankruptcy. These monthly operating reports may be reviewed by any party in interest to the case and also form a basis to determine the feasibility of a plan of reorganization. If the debtor continually sustains a monthly net loss as demonstrated on the monthly operating reports, its hope for reorganization may be diminished.

Additionally, the business debtor must also stay current in the filing of all applicable tax returns and payment of taxes, including monthly sales tax and employee withholding tax obligations. This may be a challenge for businesses that do not maintain regular accounting books and records, or may routinely default in the payment of taxes. If the business accounting records and tax reporting is not current or accurate prior to the Chapter 11 being filed, an effort should be made as soon as possible to arrange the resources necessary to ensure that correct and timely tax filing and payments are made as soon as the Chapter 11 is filed. Tax obligations accrued prior to the bankruptcy may be dealt with in the plan, which often means that pre-petitiion sales tax obligations in Chapter 11 are repaid over five years at low interest.

The Chapter 11 business debtor has additional requirements to these, including the requirement to immediately open new debtor-in-possession bank accounts and close all pre-petition bank accounts, to maintain all insurance standard in the debtor’s particular industry, to pay a quarterly fee to the Office of the U.S. Trustee that monitors the debtor’s finances throughout the Chapter 11 proceeding, to attend various interviews and hearings conducted by the U.S. Trustee, as well as adhere to other restrictions on compensation, partner distributions, use of cash and more.

Keep reading for more on the Chapter 11 process, timeline and fees involved in a reorganization.

A qualified Chapter 11 attorney can advise your business of all the requirements and obligations before a Chapter 11 bankruptcy case is filed. Wartchow Law Office provides initial Chapter 11 consultations to review the business liabilities and other circumstances affecting a possible Chapter 11 bankruptcy proceeding, and to advise on possible options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects.

Defined: The Bankruptcy “Trustee” and the “United States Trustee”

The terms “trustee” and “United States Trustee” sound similar and often encompass similar objectives, however the role of the trustee in bankruptcy proceeding is distinctly different than that of the United States Trustee.

The “United States Trustee” (also called the U.S. Trustee or “UST”) is essentially a federal office within the U.S. Department of Justice that oversees the administration of all bankruptcy cases in a certain district. Here in the district of Minnesota as in other districts, the office of the U.S. Trustee employs a group of staff attorneys, financial analysts and other professionals all charged with the responsibility to promote the efficiency and protect the integrity of the federal bankruptcy system. The Office of the US Trustee does not always directly engage in consumer Chapter 7 and Chapter 13 bankruptcy proceedings, however does monitor each case to determine whether legal action needs to be taken in order to enforce the requirements of the Bankruptcy Code and to prevent fraud or abuse. The UST often reviews petition and schedules filed with the Court to determine whether fraud exists or if an audit must be conducted to uncover more information. However in the majority of consumer Chapter 7 and Chapter 13 bankruptcy cases, the individual debtors will never hear from the United States Trustee or be subject to its action. In Chapter 11 cases, the Office of the US Trustee becomes a principal player in monitoring the business reorganization proceeding.

In contrast, the “trustee” (also called a “panel trustee” or a “standing trustee” in Chapter 13 cases) is often a private attorney charged with the responsibility to administer a bankruptcy, hold the meeting of creditors, and distribute any non-exempt assets to creditors. A bankruptcy trustee is appointed to every individual’s Chapter 7 or Chapter 13 consumer bankruptcy case. In the District of Minnesota, there are approximately 25 such attorneys that serve as Chapter 7 and Chapter 13 trustees. Unlike the US Trustee whose main objective is to ensure the integrity of the bankruptcy process, the role of the Chapter 7 trustee is to collect any non-exempt assets of the debtor, liquidates those assets, and then distribute the proceeds to creditors. In Chapter 13, the trustee additionally evaluates the debtor’s financial affairs, makes recommendations to the Court with regard to the Chapter 13 plan and ultimately administers a the Chapter 13 plan by collecting payments from the debtor and disbursing the funds to creditors. In Chapter 11, no trustee is initially appointed and the debtor effectively operates as its own trustee, i.e., the “debtor in possession”.

Lynn Wartchow is the founding attorney of Wartchow Law Office located in Edina, Minnesota and representing consumer and business clients in Chapter 7, Chapter 13 and Chapter 11 bankruptcy proceedings throughout the Minneapolis and St. Paul and surrounding areas.