What is a Debtor in Possession in Maryland? Roles & Duties

What is a Debtor in Possession In Maryland

The prospect that your once successful business may fail can be difficult to admit, and the resulting stress can impact not only you, but your relationship with your employees, family, and business contacts. Before shuttering your doors, there may be a way to save your business and hold onto what you’ve worked so hard for.

Chapter 11 bankruptcy gives you the ability to retain control as a Debtor in Possession (DIP). This phrase is unique to bankruptcy, and you may be wondering, “What is a Debtor in Possession in Maryland?”

Becoming a Debtor in Possession puts you and your business in a unique role that can give you and your business control and transparency to properly steer the course of your business recovery in Chapter 11 bankruptcy. Let’s take a deeper look into the roles and responsibilities of a Debtor in Possession.

The Difference Between Chapter 11 and Chapter 7

Chapter 11 bankruptcy is often referred to as “reorganization.” At its core, Chapter 11 is a lifeline for businesses, although individuals can file for Chapter 11 as well. Instead of completely closing your business, Chapter 11 offers you a chance to reassess, restructure, and emerge leaner and profitable.

Chapter 7, on the other hand, means closing your business and liquidating business assets to pay off debts, leading to a court-supervised closure of your business.

At the heart of Chapter 11 lies the concept of the Debtor in Possession. Now, let’s explore the answer to the question “What is a Debtor in Possession in Maryland?” 

What is a Debtor in Possession in Maryland?

If you’re considering filing for Chapter 11 bankruptcy, you may come across the phrase Debtor in Possession. But what is a Debtor in Possession in Maryland?

A Debtor in Possession (DIP) refers to an individual or corporation that has initiated the bankruptcy process and now has special obligations under the Bankruptcy Code.

However, this role isn’t just about holding onto assets. Being a DIP comes with its own set of unique rights and responsibilities. It also involves navigating the challenging path of restructuring while ensuring certain transparency to creditors.

The DIP role is pivotal in the reorganization process, balancing both control and accountability in the pursuit of financial recovery for your business.

Rights and Responsibilities of a DIP

A DIP holds a unique and crucial role. But with this position comes a series of rights and responsibilities.

Running Your Business

Running a business while in the midst of bankruptcy isn’t straightforward. As a DIP, you are in still control of your business, although you now have some additional obligations. During the Chapter 11 process, you can maintain payroll, settle payments with suppliers and vendors to ensure business continuity, and retain your leases and real estate holdings.

Opportunity to Negotiate with Creditors

A key benefit of being a DIP and the Chapter 11 process is the ability to level the playing field and negotiate with creditors from a more advantageous position. This benefit is due to the power that a DIP now has under the Bankruptcy Code to restructure debt.

Negotiating with creditors could potentially result in deals that allow your business to reduce costs and emerge profitable.

Limitations of Being a DIP

While the role of being a Debtor in Possession allows you to keep operating your business with a measure of control and flexibility, being a DIP has its limitations. Because of the power of the Chapter 11 process, the Bankruptcy Code provides for built-in checks and balances to ensure that the restructuring process is equitable for all parties involved.

A significant limitation a DIP faces is the necessity for court approval for certain decisions. You will still have the ability to make choices about typical business operations. However, choices that might profoundly impact your business or creditors cannot be made without court approval. This safeguard is in place to guarantee that the reorganization process remains fair and transparent.

How a DIP Differs from a Bankruptcy Trustee

  • Debtor in Possession: A business owner who retains control and management of their business during a Chapter 11 bankruptcy.
  • Chapter 11 Trustee: A court officer who is appointed with the specific goal of filing reports, investigating the debtor’s financial affairs, and operating aspects of the debtor’s business in the event of fraud, dishonesty, or gross mismanagement.

While a DIP operates autonomously within the parameters of the bankruptcy framework, in only rare circumstances is a Chapter 11 trustee appointed to ensure financial transparency and protection of creditor interests when the DIP fails to do so.    

The Advantages of Letting Debtors Remain in Possession

Ultimately, the Bankruptcy Court prefers that you remain in control of your business because of the advantages to all parties. Your unique understanding of your business operations and the relationships you’ve cultivated can often lead to a more efficient reorganization. Leveraging your familiarity and expertise frequently results in better-informed business decisions and outcomes.

Responsibilities and Challenges of Being a DIP

The role of a Debtor in Possession comes with a unique set of powers and privileges. However, it’s not without challenges and responsibilities that an experienced attorney can help you navigate.

The most difficult task you face is juggling the day-to-day operations of your business while adhering to your obligations under the Bankruptcy Code.      

Here are some of the more challenging obligations that an experienced bankruptcy attorney can walk you through. 

  1. You are required to close your regular business bank accounts and open a single, Debtor in Possession bank account for exclusive business-wide use.
  2. This process also includes regularly seeking court approval on any major decisions, such as selling assets, taking out new credit, hiring professionals (such as accountants), and certain other business functions.
  3. Another key obligation while in Chapter 11 bankruptcy is to prepare and file Monthly Operating Reports (MORs) which provide the court with monthly updates that detail the revenue and expenses of your business. Filing MORs provides transparency to all related parties to ensure that the business isn’t wasting assets or making fraudulent transactions. 

Additionally, navigating the intricate and complex legal requirements is a challenge on its own. With proper legal assistance, businesses have the potential to emerge from Chapter 11 debt-free.

How a Chapter 11 Lawyer Can Help

In the intricate world of Chapter 11, having an experienced bankruptcy attorney makes all the difference, because they can:    

  • Advise you about your obligations as a Debtor in Possession in Maryland and the unique challenges that come along with those requirements;                
  • Represent and advocate for your interests diligently in court against creditors;    
  • Negotiate with creditors to secure favorable terms for you because of your unique rights under the Bankruptcy Code;
  • Advise and assist you with preparing the required financial documentation you will need to file Chapter 11;
  • Draft the complex paperwork required for a Chapter 11 case including the Chapter 11 Plan and Disclosure Statement; and
  • Ensure compliance with your legal obligations throughout the reorganization process.    

An experienced bankruptcy attorney can bring a fresh perspective to your business and recognize how the Bankruptcy Code can be used to your advantage, which can lead to a successful Chapter 11 process, allowing your business to emerge profitable.

Contact Steiner Law Group

If you or your business are financially struggling, or you would like to learn more about  “What is a Debtor in Possession in Maryland,” schedule a consultation today or call us at (410) 670-7060.

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About Eric Steiner, Esquire

Mr. Steiner graduated from the University of Michigan Law School in 2006. Since then, he has focused his practice on bankruptcy, real estate, commercial and consumer collections, including representing the third largest lender in the greater Baltimore area.