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.
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.