Debtor In Possession Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Debtor In Possession, written in plain English, along with examples of how it is used.

What is Debtor In Possession?

a bankrupt person remaining in possession of property even if a creditor has a lien

History and Meaning of Debtor In Possession

Debtor In Possession refers to an individual or entity that files a bankruptcy petition and is allowed to continue to operate their business and control their assets during the bankruptcy process. This is in contrast to a trustee appointed by the court, who would typically have control over the assets of the debtor. The right of a debtor in possession to remain in control of their assets is provided for under the United States Bankruptcy Code.

The role of the Debtor In Possession was established in the 1978 Bankruptcy Reform Act, which replaced the old bankruptcy system in the United States. The idea behind the provision was to allow struggling businesses that filed for bankruptcy to stay afloat and continue to operate while working towards restructuring and resolving their financial difficulties.

Examples of Debtor In Possession

  • A company files for Chapter 11 bankruptcy and is allowed to continue running its business with a Debtor In Possession status while it restructures its debt and operations.

  • An individual files for Chapter 13 bankruptcy and is allowed to keep their property while paying off their debts through a court-supervised repayment plan.

  • A small business files for Chapter 7 bankruptcy but is allowed to sell its assets with a Debtor In Possession status in order to pay off its creditors.

Legal Terms Similar to Debtor In Possession

  • Bankruptcy trustee: A court-appointed individual who has control over the assets of a debtor during the bankruptcy process.

  • Chapter 11 bankruptcy: A form of bankruptcy that allows businesses to restructure their debts and operations in order to become profitable again.

  • Chapter 7 bankruptcy: A form of bankruptcy that involves liquidation of assets in order to pay off creditors.

  • Chapter 13 bankruptcy: A form of bankruptcy that involves a court-approved repayment plan for individuals with regular income.