Debtor in Possession Account: 6 Requirements the US Trustee Enforces

When filing Chapter 11, pay attention, your duties as a debtor-in-possession begin on the day you file your petition unless the court orders otherwise. While there are other duties, make sure to take care of these six: close old bank accounts and open new debtor-in-possession accounts at a bank the U.S. Trustee approves; set aside withheld taxes; establish new books; insure your property; file monthly reports; and don’t run up expenses you can’t pay. And insiders can’t be paid unless the court approves it.

DIP Accounts

The day you file your petition, you’ll need to close your old bank accounts and transfer the funds (unless they’re cash collateral) to a new debtor-in-possession (DIP) account, which you’ll use to run your business during bankruptcy. The U.S. Trustee must approve the bank where you open the DIP account. You’ll need to reach out to your local U.S. Trustee and ask for a list of approved banks. When you close your old accounts, make sure that you also void any checks that haven’t been cashed. If you close the old bank accounts and open new DIP accounts, be ready to prove it. Within 15 days of filing, a sworn statement listing each old account you’ve closed is due in Region 20.

Approval by the U.S. Trustee’s Office in one district doesn’t carry over to another district. Some U.S. Trustee Offices require three DIP accounts: one for payroll expenses, one for tax payments, and one to keep up with business expenses. In some regions, “Debtor-in-Possession” and your bankruptcy case number must be printed on every check. On any accounts that have a balance over the amount insured by the Federal Deposit Insurance Corporation, make sure the bank secures that balance with a bond or pledged securities, unless the court waives it.

If you have employees, you probably have tax withholding obligations. You can’t use withheld taxes to pay creditors and other expenses. You’ll have to segregate the withheld portion of employees’ paychecks and pay it when due. And you have to make sure any state or local taxes are handled with similar care. Even during the bankruptcy process, all payroll taxes and sales taxes (and similar taxes that are paid by your customers but collected by you) must be held in trust.

Almost as soon as you’ve filed, you’ll need to close out your old accounting books and open new ones. Your new books should include detailed accounts of all income and expenditures, receipts and disbursements. You’ll also need to file monthly operating reports during your bankruptcy. These reports require information about your finances during your case, which you will be able to find in your new books.

Monthly Operating Reports

The monthly operating reports are due on the fifteenth of each month. For instance, your report for the month of July is due on August 15th. These reports track how your finances changed during each month of your case. The reports go to the U.S. Trustee, the creditors’ committee, and the court. It’s important to talk to the U.S. Trustee about deadlines in your region, as the rules aren’t uniform nationwide. If you don’t file the reports on time, the U.S. Trustee may move to dismiss your case.

You must also pay a quarterly fee to the U.S. Trustee, unless your case is under subchapter V. The quarterly fee depends on the total disbursements from your estate. The minimum is currently $250. The quarterly fee is paid online through Pay.gov now, instead of by mail. If you try to pay by check or money order, the payment will be sent back. If you fail to pay the fee, your case could be dismissed.

Insure the Property in Your Estate

Bankruptcy doesn’t get you out of being responsible for your property. You need to insure the property in your estate against loss, theft, and damage, for no less than its fair market value. During your case, you have to make sure any insurance that protects the bankruptcy estate continues to stay in force. If you have problems keeping the insurance in place, you need to tell a few people right away: the court, creditors with liens on the property, the creditors’ committee (or the 20 largest unsecured creditors if there’s no committee), and the U.S. Trustee. If the insurance on your property lapses or is canceled, the bankruptcy could be converted or dismissed.

During your case, you can’t just run up bills. Before you incur expenses, you’ll need to evaluate whether the business can really afford the cost. The monthly operating reports tell you and others whether the business is taking in more than it’s spending. And a business that takes in less than it spends isn’t going to last long. You need to do your best to avoid administrative or priority expenses that post-filing revenue can’t reasonably pay. If keeping the business open may pile up such expenses that likely won’t get paid, the court will want to know promptly.

You’re still the owner and the decision maker, but that doesn’t mean you can pay yourself the same salary you got before the Chapter 11 filing. If you need to pay yourself or another insider, you’re going to have to ask the court for permission first. The motion needs to state your grounds for needing to pay the insider, what they’ll do, and the salary and benefits you want to pay. The motion should also list what the insider got from the business during the six months before your filing, and their salary on the date you filed. The insider should verify the motion. The judge may approve the motion without a hearing if your local rules let it and it’s properly served on the U.S. Trustee, the secured creditors and the committee’s lawyer. If the judge enters such an order, anyone with cause can later ask to undo or change that order.

If you don’t file monthly reports or pay quarterly fees, the U.S. Trustee may move to convert or dismiss your case for cause. Cause is case-specific, but it can be shown if you don’t give the U.S. Trustee information on time or fail to maintain insurance. Such a motion moves fast: the court generally has to start the hearing within 30 days after it’s filed, unless the side that filed it agrees to wait or something compelling gets in the way. But don’t wait for the U.S. Trustee to remind you. Your bankruptcy attorney can help you keep these rules in mind, but you’re responsible for getting it all done.