Debtor in Possession

Primary tabs

When a debtor or creditors files bankruptcy under Chapter 11 of the Bankruptcy Code, debtors can reorganize or reconstruct the assets to pay the debts. In this case, the debtor essentially works as a trustee, and is called a debtor-in-possession (DIP). The court in certain situations may appoint a trustee, but under Chapter 11 a trustee is not mandatory.

The DIP has an exclusivity period of 120 days from the filing date to propose a reconstruction plan. During this exclusivity period, the DIP has great power. All of the creditors and equity security holders need to negotiate with the DIP for a plan. However, the DIP’s activities are under the monitor of a committee (11 U.S. Code § 1102) of unsecured creditors. If the committee loses confidence in the management of the DIP, the committee can ask the court to appoint a trustee.

If the reconstruction plan proposed by the DIP is confirmed by the court, and the debtor follows the plan for 3 to 5 years, depending on the court’s decision, the debts will be discharged.

[Last updated in June of 2020 by the Wex Definitions Team]