Debtor-in-Possession: What It Means in Chapter 11 Cases
Dec. 9, 2025
Filing for Chapter 11 bankruptcy can feel like a monumental step for any business owner. The process introduces a host of new terms and procedures, one of the most significant, being "debtor-in-possession." Understanding concepts like debtor-in-possession is fundamental, and having a knowledgeable attorney on your side can make a substantial difference in the outcome of your case.
At Vivona Pandurangi, PLC, we understand the challenges of business reorganization. Our attorneys bring a results-oriented approach to every case, focusing on practical solutions that help you avoid legal bureaucracy and expenses. Serving businesses and individuals in Falls Church, Alexandria, Arlington, Fairfax, Manassas, Prince William, and Loudoun, we provide clear guidance through the bankruptcy process and help your business find a path forward.
What is a Debtor-in-Possession (DIP)?
When a business files for Chapter 11 bankruptcy, it often continues to operate. In this scenario, the business entity is referred to as the "debtor-in-possession" (DIP). This legal status is unique to Chapter 11 reorganizations. Unlike in a Chapter 7 liquidation, where a trustee is immediately appointed to take control of the debtor's assets, in a Chapter 11 proceeding, the debtor typically retains control.
The DIP essentially wears two hats. It is both the debtor seeking relief from its debts and a fiduciary with responsibilities to its creditors. This means the company's management continues to run daily business operations—like managing payroll, paying suppliers, and serving customers—but does so under the supervision of the bankruptcy court. The underlying principle of Chapter 11 is to give the business a chance to restructure its finances and become profitable again. Allowing existing management to stay in place is seen as the most efficient way to achieve this.
The court grants the debtor-in-possession the powers and duties typically assigned to a bankruptcy trustee. This arrangement enables those who know the business best to guide it through the reorganization process. However, this power is not absolute and comes with strict obligations to act in the estate's and its creditors' best interests.
The Powers and Duties of a Debtor-in-Possession
Acting as a debtor-in-possession involves a significant shift in responsibilities. While day-to-day management might look similar, the DIP operates with a new layer of legal and financial accountability. The Bankruptcy Code outlines specific powers and duties that a DIP must fulfill. These include:
Operating the business: The most fundamental power is the authority to continue operating the business. This includes making routine business decisions without needing court approval for every transaction.
Obtaining financing: A DIP can seek post-petition funding, known as DIP financing. This new credit is often given priority over other debts, making it an attractive proposition for lenders and providing the business with necessary working capital.
Assuming or rejecting contracts: The DIP has the power to review all existing executory contracts and unexpired leases. It can choose to "assume" (continue) those that are beneficial to the business and "reject" (terminate) those that are burdensome.
Using cash collateral: A DIP may need to use cash collateral—cash or equivalents in which a creditor has a security interest. To do so, the DIP must either get the creditor's consent or obtain a court order by providing the creditor with "adequate protection" for its interest.
Avoiding powers: The DIP can act like a trustee to recover money or property. This includes the power to undo certain pre-bankruptcy transactions, such as preferential transfers made to a creditor shortly before filing or fraudulent conveyances made to hide assets.
Primary duties of a DIP are essential when seeking a smooth process. Key elements include:
Fiduciary responsibility: The DIP must act in the best interests of the creditors and the estate. This duty requires transparency and prohibits self-dealing.
Accounting and reporting: The DIP is required to account for all property, file regular operating reports with the court, and maintain detailed financial records.
Filing a plan of reorganization: The central goal of Chapter 11 is to propose a viable plan. The DIP has the exclusive right to file a plan for a specific period, typically the first 120 days.
Investigating the debtor's affairs: While it may sound odd, the DIP has a duty to examine its own conduct and financial condition to prepare an accurate plan.
Closing the case: After the plan is confirmed and administered, the DIP is responsible for filing a final report and accounting to close the bankruptcy case formally.
Speak with a strategic attorney to learn more about each process. Seeking an attorney is extremely beneficial in the long-run.
Debtor-in-Possession in Virginia
In Virginia, Chapter 11 bankruptcy cases are handled in federal bankruptcy courts. The general principles governing debtor-in-possession are specified in the U.S. Bankruptcy Code, which applies nationwide. However, the local rules and procedures of the Eastern District of Virginia (which includes Alexandria) and the Western District of Virginia can influence how a case proceeds.
For instance, the U.S. Trustee for Region 4, which oversees cases in Virginia, has specific operating guidelines for Chapter 11 debtors-in-possession. These guidelines dictate requirements for bank accounts, insurance, physical inventories, and the format and frequency of monthly operating reports. Adherence to these local requirements is mandatory. Failure to comply can lead the U.S. Trustee to file a motion to convert the case to a Chapter 7 liquidation or to appoint a separate trustee, thereby stripping the debtor of its DIP status.
Virginia businesses operating as DIPs must be diligent in following these regional rules. For example, a DIP must immediately close its old bank accounts and open new DIP accounts, clearly indicating its status as a debtor-in-possession. All financial reporting must be timely and accurate, providing a clear picture of the company's performance during the bankruptcy. An attorney familiar with the specific procedures of Virginia's bankruptcy courts can provide invaluable assistance in meeting these obligations.
When a Trustee Can Be Appointed
While the debtor-in-possession model is the default in Chapter 11, it is not guaranteed to last for the entire case. The bankruptcy court can appoint a Chapter 11 trustee "for cause" or if it is in the best interests of the creditors. This action removes the debtor from control of the business. "Cause" for appointing a trustee can include:
Fraud, dishonesty, incompetence, or gross mismanagement by the current management.
Failure to comply with court orders or reporting requirements.
An unreasonable delay in the case that is harmful to creditors.
If a party in interest, such as a creditor or the U.S. Trustee, files a motion and provides evidence of such issues, the court will hold a hearing to decide whether to appoint a trustee. The appointment of a trustee is a significant development, as it signals a loss of confidence in the debtor's ability to reorganize successfully on its own. The trustee takes over all the powers and duties of the DIP, making all operational and restructuring decisions for the company.
Bankruptcy Attorneys in Falls Church and Alexandria
At Vivona Pandurangi, PLC, we believe in making legal help more accessible and affordable for everyone. When you work with us, we help you avoid legal complications and the associated costs. We are zealous advocates for our clients, bringing a results-oriented approach to the practice of law. With offices in Falls Church and Alexandria, our team serves Arlington, Fairfax, Manassas, Prince William, and Loudoun. Call now for the clear, effective representation you need to move forward.