Can You Run a Business While in Bankruptcy? -

     Can you really run a business while in bankruptcy? The answer is: It depends on what chapter is filed, as shown below on this page.

Operating a Business

     When a debtor is permitted to operate his business, he generally will have the full panoply of rights and powers that are given to a trustee. This means that the debtor can operate the business, enter into leases, sell property, and possibly reject collective bargaining agreements under Section 365 of the Bankruptcy Code.

     The debtor can also "lien-strip" the claims of secured creditors under Section 506(b) of the Bankruptcy Code, file a disclosure statement in Chapter 11 with various provisions, including a liquidation analysis of what would occur in a hypothetical Chapter 7 case, propose a Chapter 11 reorganization plan with "cram-down" provisions, if needed, and pursue a variety of claims against third parties to try to bring money into the bankruptcy estate.

Receivership Before the Bankruptcy Filing

Generally speaking, if the debtor's business had been put into a receivership before the bankruptcy filing, then the filing of the bankruptcy compels the termination of the receivership, unless the court orders otherwise.

Chapter 7

     Under Chapter 7, the answer to the above question is generally no, the debtor cannot run the business. Under Section 541 of the Bankruptcy Code, the business and all other assets pass to the bankruptcy trustee. At this point, operations have usually ceased or been reduced drastically. Under Bankruptcy Code Section 704, the trustee's job is to liquidate assets, reduce them to cash, and pay creditors in the priority scheme set forth in the Bankruptcy Code.

     Chapter 7 is for liquidation, not reorganization. That being said, under Bankruptcy Code Section 721 the court can allow the trustee to operate the business for a limited period if the operation is in the best interest of creditors and the estate and consistent with orderly liquidation. For example, a trustee may want to operate a restaurant for a limited period after a bankruptcy filing, to preserve its goodwill value for potential buyers. In limited circumstances, especially where the debtor is the sole proprietor of a business, the debtor will continue to operate post-bankruptcy. This is because the debtor has claimed the business as exempt, or the trustee has abandoned his interest in the business under Bankruptcy Code Section 554 as being of inconsequential value or benefit to the estate.

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Chapter 11

     Under Chapter 11, the answer is yes. The debtor continues to run its business, as a "debtor in possession" or "DIP". Chapter 11 is the most-popular business reorganization chapter. Its primary purpose is to provide a framework for the debtor to preserve the going-concern value of the business, maximize the pay-back to creditors, and allow the owners to retain a stake in the company for the future.

     Chapter 11 is a key element of modern economic life. It essentially rescues companies from the scrap heap of bankruptcy, preserving jobs for the employees, and providing a valuable societal function. To further this goal, Section 363 of the Bankruptcy Code allows the debtor to continue to use, sell or lease property in the ordinary course of its business. This means that for all intents and purposes, it can run its business just like it did before the bankruptcy filing, but with relief from creditor pressure.

     Under Chapter 11, there are certain restrictions on the operations post-bankruptcy, of course, as part of the trade off for the relief provided. For instance, if the debtor wants to take actions outside of the ordinary course of business, then it needs to obtain court permission to do so, after giving creditors notice of the proposed action and an opportunity to be heard. There is supervision by Court, the Office of the U.S. Trustee, and possibly by a Creditors Committee, plus detailed reporting requirements, but these are designed to assist the debtor in pursuit of a successful reorganization plan.

Chapter 12

     Under Chapter 12, the answer is yes. The family farmer or commercial fisherman continues to operate his business as a "DIP". There is a Chapter 12 trustee, but he usually simply assists the debtor and acts as a disbursing agent. However, for cause shown, the trustee can take over the business operations from the debtor.

Chapter 13

     Under Chapter 13, the answer is yes, the debtor continues to operate his business. Chapter 13 can be filed by individuals only, so the only type of business in Chapter 13 will be a sole proprietorship. There is no provision in Chapter 13 for anyone else, including the Chapter 13 trustee, to operate the debtor's business.

Written by Henry Rendler