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Advantages the Debtor in Possession Role Offers in Chapter 11

In Chapter 11 bankruptcy, a corporation, partnership, or sole proprietorship can reorganize the business, continue operations, and work to pay off debts.  The debtor stays in possession of the business and acts as the fiduciary, called a debtor in possession.

Maintaining control over the business provides advantages for debtors because they have more decision-making power over the outcome.  Also, under Chapter 11 there are no debt limitations for bankruptcy protection.  The purpose of the bankruptcy is to make all the payments outlined in the bankruptcy plan.  In most Chapter 11 cases, unlike Chapter 13, there is no time limit for making payments.

Functions of a debtor in possession

Under the Bankruptcy Code, Title 11 USC § 1107 (http://www.law.cornell.edu/uscode/text/11/1107) a debtor in possession has many of the rights that a trustee has when overseeing reorganization.  While the debtors in possession do not have the investigatory functions of the trustee, they perform other fiduciary duties that a trustee would, such as—

  • Filing monthly operating reports required in bankruptcy
  • Accounting for company property
  • Examining creditor claims
  • Objecting to creditor claims
  • Filing tax returns
  • Ability (under court approval) to hire bankruptcy case personnel, such as:
  • Accountants
  • Appraisers
  • Attorneys
  • Auctioneers

Trustees oversee the activities of debtors in possession, ensuring they comply with reporting requirements.

Court approval is the major concern

Debtors in possession must obtain court approval of their debt payment plans.  The plan classifies debtors and specifies what income to use for funding payments.  Creditors also vote to approve or reject the plan.  When a debtor in possession is unable to formulate a plan that the court is willing to approve, debtors still have the option of converting the Chapter 11 to a Chapter 7 filing.

Throughout the Chapter 11 process, an experienced bankruptcy lawyer can provide business owners with valuable legal guidance and services.

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