Debtor in Possession

Chapter 11 Bankruptcy is designed to allow a business to remain in operation while the owners work to repay debts owed to various creditors. Since bankruptcy of a business would likely affect numerous employees and contractors, the court generally wants to keep the business going to minimize the potential damage done while a business reorganizes itself with court oversight.

Retaining control over assets

Unlike in Chapter 7 and Chapter 13 bankruptcy, in Chapter 11 either the debtor or the debtor’s creditors can file for relief under Chapter 11. Regardless of which party makes the filing, the court will generally allow the person or corporation running the business to remain in control of the company’s assets and the day-to-day business operations. Since the debtor will keep control of the business in place of a court-appointed trustee, the debtor takes on the role of “debtor in possession.”

As the reorganization of the business continues under Chapter 11, the debtor is usually allowed to keep possession of the assets until the debtor has paid off the debts or the court dismisses the case. In some cases, the court might convert the Chapter 11 case to a Chapter 7 liquidation or appoint a Chapter 11 trustee to oversee the proceedings. Although possible, conversion or later appointment of a trustee rarely happens during a reorganization. In the majority of cases, the debtor operates as the trustee during the reorganization. In general, the debtor does not have any powers to investigate its own business activities as the case progresses.

The debtor in possession does have the ability to appoint any professional help needed during the reorganization. Help might include services provided by attorneys, accountants, or auctioneers. In addition, the debtor must file any tax returns and reports required by the court during the reorganization.

Protection for corporation’s stockholders

Chapter 11 gives added protection to a corporation’s stockholders, since none of the stockholders are at risk to lose anything other than the value of their stock in the company. If the debtor is a sole proprietorship or involved in a partnership, however, the parties involved or the court might have difficulty separating personal debts from business debts. This limitation may put a business partner’s personal assets as risk unless the partner is able to file for bankruptcy protection.

The concept of “debtor in possession” allows a debtor to continue its day-to-day business activities with minimal disruption to its operations while undergoing reorganization of the business. Accordingly, this ability provides extra protection for stockholders if the debtor is a corporation and minimizes the potential impact on employees and contractors as the company works to pay off debts to creditors.