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Understanding debtor in possession

On Behalf of | Aug 3, 2021 | Chapter 11 Bankruptcy

Many business owners file for Chapter 11 bankruptcy protection from creditors and continue to operate the business throughout the process if the court accepts it. While this is not automatically an assignment that bankruptcy courts will sign off on, it is still very common. The legal term for this continuing arrangement is termed “debtor in possession,” and it means exactly that. The owner has outstanding financial liabilities that would otherwise cause the business entity to close.

Advantages of debtor in possession designation

The primary advantage of being assigned debtor in possession is the ability to continue operating the business while the Chapter 11 bankruptcy is processed. This buys some time for the owners to establish a repayment schedule, which can be as much as 120 days. In addition, the entity can generate incoming cash flow that can be used to potentially hold creditors off from collection efforts until the petition is accepted by the court and outstanding creditors. It also allows 60 days thereafter to negotiate with those outstanding creditors who may be willing to renegotiate repayment terms.

Potential problems with assignment

Being assigned debtor in possession status is not an automatic decision by the court. Often it takes assistance from an experienced Chapter 11 bankruptcy professional who understands what the court is evaluating when issuing authority to continue conducting business under legal protection. Creditors can also contest the designation, and convincing them this is the best course of action can be a difficult task in some cases.

The truth is that most creditors primarily only want their accounts to become current. Being allowed to continue business as a debtor in possession can help owners accrue cash flow that can be used to support their submission of a repayment schedule or even eliminate some creditors in the process by renegotiation.