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What is a Debtor in Possession?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 14 November 2016
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Debtor in possession refers to people or more accurately businesses that are in Chapter 11 bankruptcy in the United States. The term may be used slightly differently from state to state because states often determine specific bankruptcy laws. In more specific terms, the debtor in possession is a business that continues to hold assets they may owe money on, especially during the period before financial reorganization of the company is finalized. Thereafter, retaining possession of certain things can be up to the courts or the individual deals struck with lenders.

Especially when Chapter 11 is filed, there is hope that a company will be able to restructure its debt so that it can again become solvent. Certain things might make this very difficult like losing equipment the company needs to manufacture products, losing transportation to deliver products, or not possessing other vital things that keep the business running. The obstruction, here, is that creditors who loaned money to pay for these things want to get paid and if they insist on this, the debtor won’t be in possession for long.

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With the help of an attorney and with court decisions, the debtor in possession may be able to make a good argument that certain things must be kept, and for as long as the filing continues, creditors usually aren’t able to repossess anything. Once a case is finalized and restructured, there are several ways a debtor in possession may be able to satisfy certain creditors. One of these would be to pay a reduced amount for things possessed. For example, the debtor might satisfy the creditor by paying the market value of any items. Another option could be to change payments to a lower amount and alter the terms of the present credit agreement.

Those who file Chapter 11 are also called debtors in possession because this indicates how the courts handle the initial filing. Sometimes when companies declare certain types of bankruptcy, any assets the company has are taken over and managed by a court-appointed trustee. With Chapter 11, this usually doesn’t occur, and the debtor in possession remains in control of the assets until a final ruling on the bankruptcy occurs.

Though the term is not technically used to refer to most personal Chapter 7 or 13 bankruptcies, many of these involve a debtor in possession status too. A person who has a home or car loan and who files bankruptcy is sometimes able to maintain these loans while other debts are excused. The person thus remains in possession of something technically owned by a creditor. Excusing or renegotiating debts may make it more possible for the debtor to pay loan or car payments on time in the future.

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Terrificli
Post 4

@Markerrag -- We should encourage people to not borrow more than they could pay, but we don't. One of the reasons houses, cars and even college educations cost so much is that it is assumed that the easy availability of credit means people will go into debt to purchase expensive things.

If we encouraged people to only spend money on things they could afford, the economy would grind to a halt. If we encourage a bunch of spending, you've got to give people a way out when things go wrong.

Bankruptcy is that way out and the system works pretty darned well.

As for suggesting people and businesses shouldn't have bitten off more than they could chew when running up debt, things happen. People get sick and lose jobs. Recessions hit and hurt businesses. That's just the way it goes.

Markerrag
Post 3

@Soulfox -- Playing devil's advocate here. Perhaps those companies and businesses shouldn't have taken on more debt than they could handle in the first place. By allowing companies and people to keep their stuff, aren't we just encouraging too much borrowing? Can't we argue that we ought to encourage just the opposite?

Soulfox
Post 2

@Logicfest -- The concept is an easy one to grasp, too. As the article points out, technically all businesses and individuals who file for bankruptcy are debtors in possession when they keep property that is subject to the bankruptcy estate.

Again, think of the social damage if people and companies were stripped of everything they own in order to pay off their debts the best they can. If that is what happened, who would bother with filing for bankruptcy?

Logicfest
Post 1

This doctrine actually makes a lot of sense. When a business files a chapter 11, it is hoped that the company will be able to restructure its debt and emerge as a profitable enterprise by the end of it. A company can't do that if the court takes all of its equipment and items it needs to keep control of in order to do business.

What's more important to the overall economy? Repossessing things or letting a company keep the equipment it needs and keep providing jobs to people who rely on them? The Bankruptcy Code has pretty well answered that question through the "debtor in possession" status.

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