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What is a Debtor in Possession in Chapter 11 Bankruptcy?

What an Oklahoma business should do after filing a Plan of Reorganization

Chapter 11 is a type of bankruptcy that allows distressed debtors to reorganize or restructure their liabilities in a manner that will help them get back on stable financial footing. While there is some stigma around filing for bankruptcy, it is actually reasonably common: According to data collected and published by the American Bankruptcy Institute (ABI), approximately 5,500 business file for Chapter 11 protection each year.

A company filing for Chapter 11 is a company that is trying to stay in business. As the bankruptcy petition makes it way through the bankruptcy process, the business that has filed for bankruptcy will become a debtor in possession. Below, we provide an overview of the meaning of debtor in possession, and we explain the most important things that Oklahoma small businesses need to know about getting a Chapter 11 bankruptcy plan confirmed.

Debtor in Possession: Understanding the Basics

A debtor in possession (DIP) is a legal term that is used to refer to a party that is keeping control of its own assets and continuing operations while it is in the Chapter 11 bankruptcy reorganization process. Notably, the United States bankruptcy code contains a number of strict rules and regulations regarding the duties of DIPs. Although individuals may file for Chapter 11, the vast majority of the time the process is used to for reorganization. As such, the debtor in possession is usually a company—possibly an Oklahoma corporation, an LLC, a partnership, or a sole proprietorship.

The Key Elements of a Chapter 11 Reorganization Plan

As explained by the United States Courts, a Chapter 11 bankruptcy plan must meet certain standards before it can be approved by the court for a bankruptcy filing. Specifically, some of the required elements that Oklahoma businesses must include within a restructuring plan are:

  • A clear designation of the classes of creditors’ claims that will be affected by the bankruptcy proceedings
  • An overview of the unimpaired and impaired classes of creditors
  • An explanation of how impaired creditors will be treated
  • An adequate, viable means for implementation of the plan

Confirmation of a Chapter 11 Plan

Of course, filing for bankruptcy protection is only one step in the process. Oklahoma businesses that are dealing with financial distress must also get their Chapter 11 reorganization plan court approval by the bankruptcy court and they must effectively carry out the plan to continue business operations.

“The single biggest misconception: It’s how the absolute priority works in smaller private companies,” says Mark A. Craige, a bankruptcy attorney at Crowe & Dunlevy in Tulsa. “Generally speaking, a lot of people think you can just get rid of unsecured creditors by paying them some small amount, and keep your ownership in the company without putting in any new capital. And you just can’t do that.”

In most cases, Chapter 11 plans are approved after they are voted on by impaired creditors. Though, it is also possible that a bankruptcy court may confirm a plan over the objections of lenders. If you are considering filing for Chapter 11 bankruptcy protection or if your company is struggling to get its reorganization plan confirmed, contact an experienced Oklahoma bankruptcy attorney for help.

For more information on bankruptcy law, see our bankruptcy overview.

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