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Understanding the meaning of "debtor in possession"

The United States Bankruptcy Code contains many terms that are unique and not always easy to understand. One of the key terms in any business bankruptcy is "debtor in possession." When a Kentucky business makes the decision to file a petition in bankruptcy, it must choose from several different types of proceedings, including complete liquidation, reorganization of debts and continued operations and submitting to the oversight of a court-appointed trustee. A business that decides to keep operating while reorganizing its finances often becomes a "debtor in possession."

Unlike a Chapter 7 bankruptcy where the debtor turns over its property to a trustee, a debtor in possession remains in possession of the business assets of company. The debtor may remain in possession and continue to operate the business during the course of the entire bankruptcy proceeding. The advantage of being a debtor in possession is the fact that the business can continue to operate without being required to sell its assets. If the debtor is able to prepare a plan of reorganization that is approved by the court, compliance with the plan will result in the discharge or postponement of payments on certain obligations, thereby giving the debtor time to revitalize its business.

A debtor in possession must fulfill the same fiduciary duties as a trustee, including filing tax returns, providing reports on the business required by the court, negotiating with creditors, examining and objecting to claims and accounting for its assets. Also, the debtor must comply with the terms of the plan of reorganization by making timely payments of reorganized debts and not undertaking any additional financial obligations without the court's approval.

The choice between a liquidation or seeking debtor in possession status involves many factors. A consultation with an experienced bankruptcy attorney may provide useful guidance in making this decision.

Source: United States Courts, "Bankruptcy Basics - The Chapter 11 Debtor in Possession," accessed on June 10, 2017

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