What are debtors in possession?

On Behalf of | May 28, 2021 | Chapter 11 Bankruptcy |

North Carolina businesses that are unable to repay the debts that they’ve accumulated may consider filing for bankruptcy. There are many different types of bankruptcy that a business may file for. Businesses that file for Chapter 11 bankruptcy are considered debtors in possession.

What are debtors in possession?

When a business files for commercial bankruptcy under Chapter 11, it receives a blanket of protection from property repossession. Traditionally, a lender may repossess property used as collateral for a loan. However, filing for Chapter 11 bankruptcy temporarily suspends the lender’s right to do so. The business may still utilize the property for normal business activities as it undergoes the Chapter 11 bankruptcy process.

Why is this necessary?

It’s common to wonder why debtors in possession would be allowed when the creditors have liens against the property. The reality is that many businesses have a higher resale value when all of the business’s property is kept intact as opposed to selling off each asset one by one.

For example, say that you own a restaurant. A recession forces you into bankruptcy. However, you have a talented staff, loyal customers and a great reputation. You’re more likely to find someone who will pay more for your business as a whole than you would accumulate by selling off all of your assets individually. For this reason, bankruptcy courts allow businesses to be debtors in possession. Not only will you probably receive a higher sale value, but your creditors should make more money this way too.

Filing for bankruptcy is never easy to do. By taking the time to understand what various terms are, like a debtor in possession, you can better wrap your head around the entire process. The more comfortable you are with the process, the smoother it should go.