What Is a Debtor-in-Possession?

A business contemplating bankruptcy usually has two options: Filing for Chapter 7 or Chapter 11. In a Chapter 7 case, the business is closed and its assets are liquidated by a court-appointed bankruptcy trustee. The trustee effectively assumes ownership of the assets and ensures any proceeds from their sale are distributed to the creditors of the business.

In contrast, the goal in a Chapter 11 case is to try and keep the business open while it reorganizes its operations. In these cases, the court will not appoint a trustee to take over the assets of the business. Instead, the bankrupt business itself retains control under the legal status of “debtor-in-possession” (DIP).

Acting as a Fiduciary for Creditors, Other Interested Parties

A DIP effectively assumes the same role that a bankruptcy trustee would normally play in a Chapter 7 case. This means the DIP is required to act in a manner consistent with the bankruptcy court’s orders and the general guidelines published by the United States Trustee’s Office of the Department of Justice. Put another way, when a company files for Chapter 11 and becomes a DIP, it may no longer put its own interests first; it must act in the best interests of all interested parties in the bankruptcy case, including creditors, employees, shareholders, and even the court.

The DIP’s principal function is to maximize the value of the bankruptcy estate–i.e., the business–for the benefit of the creditors. Among other things, this means the DIP must protect all of the business’ assets. For example, the DIP needs to ensure that all business property is properly insured while the bankruptcy case remains pending.

The DIP also needs to keep the business running by paying employees, withholding federal taxes, and paying any expenses that arise after the filing of the bankruptcy petition. At the same time, the DIP also must act under the supervision of the bankruptcy court. So any pre-bankruptcy debts or expenses should not be paid by the DIP without the court’s permission. Nor should the DIP attempt to sell any property outside the normal course of the business without a court order.

The DIP will also typically need to close any existing business bank accounts and open new accounts under its status as the debtor-in-possession. Once again, this is done to reaffirm the DIP’s status as the fiduciary of a bankruptcy estate, as opposed to a mere continuation of the pre-bankruptcy business.

Speak with a West Palm Beach Bankruptcy Lawyer Today

The DIP’s ultimate goal is to present and obtain approval of a reorganization plan that allows the business to emerge from Chapter 11 as what will be, for all intents and purposes, a new company. If this fails to happen–if reorganization is not possible–then the court will likely convert the bankruptcy to a Chapter 7 case and appoint a trustee to close and liquidate the business.

As you can see, taking on the role of debtor-in-possession is a major responsibility. It is not something a business should attempt to do without the assistance of a qualified West Palm Beach bankruptcy attorney. If your business needs advice regarding bankruptcy, contact Kelley Kaplan & Eller today at 561-264-6850 to schedule a consultation.

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