What Is a Debtor-in-Possession?

When our clients file Chapter 7 bankruptcies, their assets go into a bankruptcy estate, which is administered by a bankruptcy trustee.  The trustee can liquidate non-exempt assets (often things like tax returns or cars with no liens) and pay creditors, in exchange for the debtors getting relief from their debts.

But in other bankruptcies, the debtors keep possession of property, even property with liens, and pay into a plan.  That’s why you may see “DIP” or “debtor in possession” used a lot, especially with Chapter 11 bankruptcies usually filed by large companies.

A debtor in possession has duties that Chapter 7 debtors do not.  For instance, Chapter 11 and 12 clients have to close their pre-filing bank accounts and open up new special “debtor-in-possession” accounts to monitor their post-bankruptcy income and expenses.  (Note:  Chapter 13 clients don’t have to get these special bank accounts!) The debtors also generally cannot sell assets without first getting court approval, unless their sale terms are included in their plan of reorganization.

Certain lenders also specialize in “debtor-in-possession financing”, which is a fancy term for lenders who make special loans to people in Chapter 11 and 12 plans to allow businesses and farms to continue operating.

If you are in a Chapter 11 or 12 bankruptcy or are thinking about one, call us to discuss what your duties as a debtor-in-possession will be.

By Ryan A. Blay, W M Law Attorney

Categories