What Does a Debtor-in-Possession Actually Do in Chapter 11 Bankruptcy?
When a business or individual files for Chapter 11 bankruptcy, a common question is, “Who actually runs things now?” Under Chapter 11 bankruptcy, a debtor-in-possession is a role that blends business leadership with legal responsibility. Instead of relying on a court-appointed trustee right away, the debtor usually continues running the day-to-day operations of their business.
However, the court expects the debtor to meet new duties that didn’t exist before the filing. This balance of control and oversight is one of the defining features of Chapter 11 bankruptcy, and it sets the stage for everything that follows.
At Todd E. Duffy PLLC, in New York City, New York, we are experienced in helping our clients understand the role of a debtor-in-possession under Chapter 11 bankruptcy. If you’re considering filing for bankruptcy or are already facing financial pressure, we can help you get started.
What Is a Debtor-in-Possession?
Once you file for Chapter 11 bankruptcy, the filer will typically be granted automatic debtor-in-possession status. You typically don’t need to submit a separate request in most situations. That status gives you (the debtor) the authority to operate the business, use business property, and make ordinary decisions, much like before filing.
However, at this stage, you are no longer acting only for your personal or business interests. The court views the debtor-in-possession as also holding assets in trust for creditors. That shift brings both opportunity and pressure, granting you time to reorganize your debts, but also enacting tighter rules for reporting and court review.
Operational Duties During Chapter 11
Once the debtor assumes the role of debtor-in-possession, their daily operations often become more detailed. As a debtor, you will still need to handle payroll, contracts, vendor payments, and customer relations. Some of the common operational duties you might be required to maintain include:
Managing ongoing business activity: The business will need to continue selling goods or providing services to generate revenue to support reorganization.
Maintaining financial records: You will need to maintain accurate books to help the court and creditors track how your money moves.
Filing regular reports: You will need to provide monthly operating reports that outline your income, expenses, and cash on hand.
Paying post-filing obligations: Any new debts you acquire after filing for Chapter 11 will typically take priority over older ones.
These routine tasks create the foundation for recovery. In addition to maintaining your business's operations, you will also need to assume legal duties that shape how the court assesses your progress.
Fiduciary Responsibilities of a Debtor-in-Possession
While you will still run your business as a debtor-in-possession, you will owe specific fiduciary duties to the bankruptcy estate and to your creditors. That means any decisions you make must reflect fairness and financial care, not personal preference. Some of these responsibilities include:
Preserving estate assets: You are expected to protect all business property from any loss or misuse.
Avoiding conflicts of interest: You must avoid putting any personal gain before creditor interests.
Making informed financial choices: Any major decision you make should be backed by documented reasoning.
Disclosing financial activity: You must be transparent with all financial activity and have documented proof for any transactions you make.
Additional Responsibilities of a Debtor-in-Possession
Apart from handling the business operations and meeting fiduciary reporting requirements, there are further responsibilities, approvals, and requirements that you will need to meet as a debtor-in-possession. These include the following.
Court Oversight and Required Approvals
The freedom to operate during Chapter 11 bankruptcy comes with boundaries. Certain actions require advance court approval. This helps prevent you from making large financial moves that could harm creditors or undermine your case. Court approval is generally needed for:
Selling major assets outside normal business operations: Large equipment, real estate, or business divisions often fall into this category.
Obtaining new financing: New loans during bankruptcy can affect creditor priorities and must be reviewed.
Paying certain pre-filing debts: Some older obligations can’t be paid without the court's permission.
Entering long-term contracts: New commitments can alter cash flow and risk.
Financing and Cash Flow
Most businesses don’t file Chapter 11 bankruptcy because they have strong cash reserves. Cash flow is usually tight. That’s where debtor-in-possession financing comes into play.
Debtor-in-possession financing is a loan granted after the bankruptcy filing that helps cover the business's operating costs during reorganization. Some key features of this type of financing include priority repayment status, court review of loan terms, short-term operational support, and strict budgeting requirements.
Asset Sales and Contract Decisions
As a debtor-in-possession, you have the authority, with court permission, to decide which assets to keep, sell, or abandon. These decisions are central to your restructuring plan under your Chapter 11 bankruptcy filing. Some common actions in this phase include:
Selling under-performing assets: This may free up cash for core operations.
Rejecting unprofitable contracts: Some long-term agreements no longer make financial sense.
Assuming beneficial contracts: Agreements that help the business grow can be kept in force.
Leasing property under revised terms: Commercial leases are often renegotiated.
Debtor-in-Possession Status for Individuals vs. Businesses
While many people associate Chapter 11 bankruptcy with large companies, individuals with high debt or assets can file under this chapter. Your role as a debtor-in-possession will work similarly in both settings.
For businesses, focus on ongoing revenue, employee payroll, and vendor relationships. For individuals, the emphasis may shift to rental property operations, managing investments, high-value personal assets, and structured repayment plans. In both cases, the debtor-in-possession remains subject to the same duty to protect estate assets.
How Control and Accountability Work Together In Chapter 11
The debtor-in-possession role exists to balance opportunity with responsibility. As the debtor, you get the chance to keep operating your business, preserve its value, and shape the restructuring process. At the same time, the court adds layers of accountability meant to protect creditors and the integrity of the bankruptcy system.
Through daily operations, fiduciary duties, court oversight, financing, asset decisions, and final plan approval, Chapter 11 bankruptcy becomes less about liquidation and more about restoration. Each responsibility builds on the last, creating a path forward that’s demanding but often worthwhile.
Contact an Experienced Chapter 11 Bankruptcy Attorney in New York
If you or your business is facing overwhelming debt, you can typically file under Chapter 11 bankruptcy. Under this form, the debtor-in-possession role carries real responsibility, and it's important to work with an experienced attorney who can help you understand your legal obligations.
At Todd E. Duffy PLLC, we help clients navigate Chapter 11 bankruptcy with a clear understanding of what control and accountability truly entail. Located in New York City, we serve clients throughout New York and New Jersey. Contact us today to schedule a free 30-minute consultation.
