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The Chapter 11 Debtor in Possession

A Chapter 11 debtor in possession is a business entity who has filed a bankruptcy petition, but continues to operate its business.  A debtor in possession continues to run the business and has the authorities and responsibilities of a trustee to manage in the best interest of any creditors.

Chapter 11 is used to reorganize a business entity, which may be a corporation, sole proprietorship, or partnership. A corporation is a separate legal entity apart from its owners. The chapter 11 bankruptcy case of a corporation does not put the personal assets of the members at risk other than the value of their investment in the company’s stock. A sole proprietorship, on the other hand, does not have a separate identity, distinct from its proprietor. Consequently, a bankruptcy case concerning a sole proprietorship includes both the business and personal assets of the owners. In a partnership bankruptcy case, the personal assets of the partners may be used to pay creditors.

Pursuant to section 1107 of the Bankruptcy Code a debtor in possession is in the position of a fiduciary, with the rights and powers of a chapter 11 trustee. Bankruptcy Code requires a debtor to perform of all but the investigative functions and duties of a trustee. These duties, set forth in the Bankruptcy Code and Federal Rules of Bankruptcy Procedure, include examining and objecting to claims, accounting for property, and filing informational reports, such as monthly operating reports, as required by the court and the U.S. trustee or bankruptcy administrator.  The debtor in possession also has many of the other authorities and responsibilities of a trustee, including the right, with the court’s approval, to employ attorneys, auctioneers, appraisers, accountants, or other professional persons to assist the debtor during the bankruptcy proceeding. Other tasks include filing tax returns and reports such as a final accounting. The U.S. trustee is accountable for the compliance of the debtor in possession with the reporting requirements.

Inside The Chapter 11 Debtor in Possession