14.1. Participants in the Bankruptcy Process

Bankruptcy court. It’s unlikely you’ll be asked about bankruptcy courts in detail. But to help your general understanding of bankruptcy, you should know a few basics, such as:

• All bankruptcy courts are federal courts, never state or local. The judges strictly specialize in bankruptcy, unlike regular federal judges who handle a variety of matters.

• Filing the bankruptcy petition results in an automatic stay, which is essentially a court order telling creditors that they can no longer attempt to collect from the debtor except through the bankruptcy process.

• The bankruptcy court’s approval is needed at several major milestones in the bankruptcy process. Probably the most important for our purposes is its role in approving a Chapter 11 reorganization plan, discussed later in the chapter. The court’s approval is needed for the language in which the plan is described to those who get to vote on it. Even if the vote is favorable, final approval from the court is needed before the plan can go into effect. The court also plays a key role in determining what happens if some groups object to the plan.

Debtor in possession (DIP). A company filing for Chapter 11 bankruptcy is often allowed to act as a DIP. A DIP continues to operate its business, and functions essentially in the role of a trustee. The DIP’s duties include the duty to disclose its finances and business operations to creditors; to account to its creditors; to object to improper claims; to respond to reasonable inquiries of the court, the creditors’ committee, and other interested parties; to participate in formulating and filing a plan of reorganization; and when the plan is confirmed, to act in conformity with the plan. A DIP must generally obtain court approval for transactions outside the ordinary course of business.

Even if done in the ordinary course of business, a DIP must always seek the court’s approval for accep