Debtor in possession definition
/What is a Debtor in Possession?
A debtor in possession is an entity that has filed for Chapter 11 bankruptcy protection, and which continues to run the business. A debtor in possession has the same powers as a trustee, and so can make decisions in the ordinary course of business without permission from the court. The court can appoint a trustee to replace the debtor in possession; this is done when the court believes that the appointment of a trustee will be in the best interests of the creditors. There is no debtor in possession for a Chapter 7 filing – only an appointed trustee.
The debtor in possession has 120 days from the bankruptcy petition date to propose a plan to the court, as well as another 60 days to convince creditors and shareholders to accept the plan. The court is allowed to extend these deadlines by as much as 14 months, thereby giving the debtor in possession a great deal of control over the process.
Court Approvals for a Debtor in Possession
A debtor in possession requires the approval of the bankruptcy court for certain actions. For example, approval is required before obtaining additional financing, selling assets that would not normally be sold in the ordinary course of business, retaining accountants or attorneys, expanding the business, closing it, or entering into or modifying leases, financing arrangements, or other contracts.
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Essentials of Corporate Bankruptcy
Advantages of a Debtor in Possession
The essential advantage of being a debtor in possession is being able to continue operating the organization. Also, a debtor in possession may be able to obtain debtor-in-possession financing that would be impossible for any other party to obtain. It may also be possible for a debtor in possession to buy property back from creditors, with the approval of the bankruptcy court.
Disadvantages of a Debtor in Possession
A debtor in possession will find that its decision-making is constrained by the bankruptcy court, since it must gain advance approval from the court for a variety of decisions. These approvals are needed to pay off debts, use assets as collateral, and pay professional advisors. Also, if the court does not approve of the actions of the debtor in possession, it can replace the debtor in possession with a trustee.