Debtor in Possession: 2026 Guide to DIP Powers, Duties, and Restrictions
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Debtor in Possession: 2026 Guide to DIP Powers, Duties, and Restrictions

Debtor in Possession: What DIP Status Means for a Chapter 11 Filer

Debtor in Possession: What DIP Status Means for a Chapter 11 Filer
Debtor in Possession: 2026 Guide to DIP Powers, Duties, and Restrictions

By CT Acquisitions Editorial Team, reviewed by senior M&A advisors. Last reviewed: June 2026.

Debtor in Possession, in One Paragraph

A debtor in possession is a company or individual that has filed for Chapter 11 bankruptcy and continues to operate its own business and manage its own property, exercising most of the powers of a bankruptcy trustee under 11 USC §1107. The existing management stays in place. No outside trustee is appointed unless a party moves for one under §1104 and the court agrees, which happens in a minority of cases. The DIP owes fiduciary duties to the estate and its creditors, must file monthly operating reports with the Office of the United States Trustee, and cannot take material actions such as selling assets outside the ordinary course of business, using cash collateral, borrowing new money, or rejecting leases without bankruptcy court approval. The status begins the moment the Chapter 11 petition is filed and lasts until a plan is confirmed, the case is converted, a trustee is appointed, or the case is dismissed.

DIP Status Versus DIP Financing: Two Different Things

The phrase “debtor in possession” gets confused with “DIP financing” all the time, and the two are separate concepts. DIP status is a legal designation created by 11 USC §1107 that lets existing management run the company through Chapter 11. DIP financing is a specific type of secured loan, authorized by 11 USC §364, that a debtor in possession may obtain to fund operations during the case, usually with super-priority claims and priming liens over prepetition secured lenders.

A company can be a debtor in possession without ever taking DIP financing (cash-rich filers often do not need it). A company cannot get DIP financing without first being a debtor in possession (or having a trustee that seeks the loan on the estate’s behalf). Keeping the distinction clean matters because the powers, duties, restrictions, and case law attach to the status, while the interest rates, fees, milestones, and covenants attach to the loan.

Attribute DIP Status (11 USC §1107) DIP Financing (11 USC §364)
What it is Legal role of a Chapter 11 filer keeping possession of assets Post-petition secured loan with priority protections
Automatic on filing Yes, unless a trustee is appointed No, requires separate motion and court order
Cost Free (statutory) Priced by lender: commonly SOFR + 700 to 1,200 bps in 2024 to 2026
Approval By operation of law Interim order within a few days, final order at 21 to 45 days
Common providers Not applicable Prepetition lenders (roll-ups), private credit funds, ABL groups
Governing rule §1107, §1108, Bankruptcy Rule 2015 §364, Bankruptcy Rule 4001(c)

Sources: 11 USC §1107, Cornell LII; 11 USC §364, Cornell LII. If your interest is on the loan mechanics, our Chapter 11 reorganization guide covers the plan process in depth.

The Statutory Basis: 11 USC §1107 and §1108

Section 1107 of the Bankruptcy Code is the source of a debtor in possession’s authority. It states that a DIP “shall have all the rights, other than the right to compensation under section 330, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4)” of a Chapter 11 trustee. Section 1108 grants the trustee (and therefore the DIP under §1107) the right to “operate the debtor’s business” unless the court orders otherwise.

The Federal Rules of Bankruptcy Procedure, particularly Rule 2015 and Rule 4001, layer procedural obligations on top of these grants: schedules and statements within 14 days, motions with hearings on notice for cash collateral or credit, and monthly operating reports on Official Form 425C for small business debtors or the equivalent US Trustee format for standard cases.

The practical effect is that Congress made continued operation by existing management the default outcome of a Chapter 11 filing. That was a deliberate 1978 shift away from the older Chapter X practice under the Bankruptcy Act of 1898, which required a court-appointed trustee in many public-company cases. The policy assumption is that management knows the business best, and that displacing management is expensive and disruptive absent proven misconduct.

Source: Chapter 11 Bankruptcy Basics, US Courts; 11 USC §1108, Cornell LII.

Who Actually Qualifies as a DIP

Any Chapter 11 debtor becomes a debtor in possession the moment the petition is filed, and stays a DIP until one of four things happens: a Chapter 11 trustee is appointed under §1104, the case is converted to Chapter 7 under §1112, the case is dismissed, or a plan of reorganization is confirmed and takes effect. That includes corporations, partnerships, LLCs, individuals, and small business debtors electing Subchapter V (with an important twist explained later).

The Bankruptcy Code does not require the DIP to be solvent, profitable, or even currently operating. It requires only that the filer be eligible for Chapter 11 (a person as defined in §101(41), which excludes governmental units and certain railroads, insurance companies, and banks). Insurance companies, banks, and most stockbrokers are pushed to different chapters or resolution regimes under §109(b) and (d).

Individuals may be DIPs in Chapter 11, though the more common individual paths are Chapter 7 or Chapter 13. High net worth individuals with complex assets, or individuals with debts above Chapter 13 limits ($1,395,875 secured and $465,275 unsecured under the 2022 to 2025 limits per 11 USC §109(e), inflation-adjusted every three years per §104), sometimes file Chapter 11 and hold DIP status personally.

Source: 11 USC §109, Cornell LII; US Courts Bankruptcy Statistics.

Powers a Debtor in Possession Holds

A DIP wields nearly every substantive power of a Chapter 11 trustee. The exceptions are narrow: a DIP cannot investigate itself under §1106(a)(3), and cannot file the investigative report that a trustee would file under §1106(a)(4). Everything else, from operating the business day to day to litigating avoidance actions worth hundreds of millions of dollars, is on the table.

Use, Sale, or Lease of Property (§363)

Section 363 lets the DIP use, sell, or lease property of the estate in the ordinary course of business without court approval, and outside the ordinary course with court approval after notice and a hearing. The §363 sale process is how most large distressed asset sales happen today. Buyers get assets “free and clear” of liens under §363(f), courts protect purchasers under §363(m), and stalking horse bidder protections (break-up fees, expense reimbursement) are baked into the standard order.

Recent examples show the scale. Bed Bath & Beyond used §363 sales in 2023 to sell its Buybuy Baby brand to Dream on Me Industries for $15.5 million and its intellectual property to Overstock.com for $21.5 million (Overstock then rebranded itself as Bed Bath & Beyond). Sears Holdings used §363 sales starting in 2018 to sell most operating assets to ESL Investments’ Transform Holdco for $5.2 billion. Rite Aid, in Chapter 11 filed October 2023 and again in May 2025, used §363 sales to divest hundreds of stores through 2024 and 2025.

Sources: 11 USC §363, Cornell LII; Bed Bath & Beyond SEC filings, EDGAR; Rite Aid Chapter 11 docket, Kroll Restructuring Administration.

Use of Cash Collateral (§363(c))

Cash collateral means cash, deposit accounts, or the proceeds of collateral in which a prepetition lender holds a security interest. Section 363(c)(2) prohibits a DIP from using cash collateral without either the secured creditor’s consent or a court order. Section 361 requires the debtor to provide “adequate protection” (usually replacement liens on postpetition receivables, cash payments, or a combination) to the lender whose collateral is being consumed.

Cash collateral orders are typically negotiated in the first 24 to 72 hours of a case, with an interim order at the “first day” hearing and a final order at the second-day or interim hearing set 14 to 21 days later. Budget covenants (usually a 13-week cash flow forecast with a variance permitted at 10 to 15 percent per line and 5 to 10 percent in the aggregate) are standard. If the DIP breaches the budget, the lender can seek relief from the automatic stay under §362(d) and terminate cash collateral use.

Source: 11 USC §361, Cornell LII; 11 USC §363, Cornell LII.

Obtaining Credit and DIP Loans (§364)

Section 364 lets a DIP borrow money. Unsecured credit in the ordinary course requires no order. Unsecured credit outside the ordinary course, or credit with priority over other administrative expenses, or credit secured by liens on estate property, requires court approval after notice and a hearing under Bankruptcy Rule 4001(c). Priming liens (liens senior to existing secured creditors) are the highest bar and require the DIP to show the existing lienholder is adequately protected under §364(d)(1)(B).

DIP financing markets in 2024 to 2026 have been dominated by private credit funds and prepetition lenders offering “defensive” DIPs to protect their collateral positions. SVB Financial’s 2023 DIP loan of $95 million from a group led by Sixth Street closed at SOFR plus 900 basis points. Bed Bath & Beyond’s 2023 DIP was $240 million from Sixth Street. Yellow Corp’s 2023 DIP was $142.5 million from Citadel and MFN Partners. WeWork’s 2023 DIP was $683 million from a Goldman Sachs-led syndicate. Spirit Airlines’ November 2024 Chapter 11 came with $300 million in DIP financing from existing noteholders including PIMCO and UBS Asset Management.

Case DIP Amount Provider Rate
SVB Financial (2023) $95M Sixth Street-led SOFR + 900 bps
Bed Bath & Beyond (2023) $240M Sixth Street SOFR + 850 bps
WeWork (2023) $683M Goldman Sachs syndicate SOFR + 750 bps
Yellow Corp (2023) $142.5M Citadel + MFN Partners SOFR + 1,000 bps
Rite Aid (2023) $3.45B Bank of America-led ABL + term SOFR + 375 to 675 bps
Spirit Airlines (2024) $300M PIMCO + UBS Asset Management Undisclosed, market rate

Sources: Bed Bath & Beyond Chapter 11 docket, Kroll; WeWork Chapter 11 docket, Stretto; Spirit Airlines SEC filings, EDGAR. Our 2026 guide to selling a business covers how distress affects M&A timing.

Assumption and Rejection of Executory Contracts (§365)

Section 365 gives a DIP one of the most valuable Chapter 11 tools: the ability to reject burdensome contracts and leases while assuming favorable ones. Rejection is a breach as of the petition date, which converts the counterparty’s claim into a general unsecured claim (typically pennies on the dollar in a distressed case). Assumption requires the DIP to cure defaults, provide adequate assurance of future performance, and continue performing.

Retail Chapter 11s use §365 to shed hundreds of stores. Bed Bath & Beyond rejected 480 store leases in the first 30 days of its April 2023 case. Rite Aid rejected more than 500 leases across its 2023 and 2025 filings. WeWork rejected 79 leases in the first 60 days and used the threat of rejection to renegotiate hundreds more, cutting future rent obligations by approximately $12 billion according to disclosure statements filed in 2024.

The deadline to assume or reject nonresidential real property leases is 120 days after the petition, extendable by 90 more days for cause under §365(d)(4). Any further extension requires the landlord’s written consent. Personal property leases and other executory contracts have looser deadlines but must generally be resolved by plan confirmation.

Source: 11 USC §365, Cornell LII.

Avoiding Powers: Preferences, Fraudulent Transfers, and Setoffs

A DIP inherits the trustee’s avoiding powers under §§544, 545, 547, 548, and 553. These are the tools that claw back value transferred out of the estate before filing. The two heaviest hitters are preferences (§547) and fraudulent transfers (§548).

A preference is a transfer to an unsecured creditor on account of an antecedent debt made within 90 days before the petition (one year for insiders) while the debtor was insolvent, that lets the creditor recover more than it would in a Chapter 7 liquidation. The DIP can sue to claw the payment back. Standard defenses under §547(c) include ordinary course of business, contemporaneous exchange for new value, and subsequent new value. Preference thresholds under §547(c)(9) exempt small transfers: below $7,575 in a case where debts are primarily consumer, and below $30,975 in a business case (inflation-adjusted 2022 to 2025 limits).

Fraudulent transfers under §548 reach further, up to two years pre-petition for actual fraud (transfers made with intent to hinder, delay, or defraud creditors) or constructive fraud (transfers for less than reasonably equivalent value while insolvent). Section 544(b) lets the DIP use state fraudulent transfer law, which typically reaches four to six years, and lets the DIP inherit the powers of any actual creditor holding an unsecured claim. Tribune, Lyondell, and other mega-cases have generated multi-billion-dollar fraudulent transfer recoveries or settlements from prepetition LBOs that left the target insolvent.

Source: 11 USC §547, Cornell LII; 11 USC §548, Cornell LII; Bankruptcy Code Dollar Amounts Revision, Federal Register.

Duties a Debtor in Possession Must Perform

Powers come with an equivalent stack of duties. The DIP is a fiduciary, not just a manager. It owes the estate and its creditors the same standard of care and loyalty a Chapter 11 trustee would owe under §1106.

Monthly Operating Reports and the US Trustee

Every Chapter 11 DIP must file a Monthly Operating Report (MOR) with the bankruptcy court, with copies to the Office of the United States Trustee. Standard cases use the UST Monthly Operating Report template (varies by region). Small business and Subchapter V debtors use Official Form 425C.

The MOR reports cash receipts and disbursements, bank statement reconciliation, aged accounts payable and receivable, tax payments, insurance coverage, and any post-petition liabilities. Failure to file MORs is one of the most common reasons for a §1112(b) motion to dismiss or convert. The US Trustee monitors compliance and can move for the appointment of a trustee under §1104(a)(2) “in the interests of creditors” if reporting is chronically late or inaccurate.

Source: Chapter 11 Operating Reports, US Trustee Program; Official Form 425C, US Courts.

Quarterly UST Fees Under 28 USC §1930

The US Trustee Program is funded by quarterly fees paid by every Chapter 11 debtor under 28 USC §1930(a)(6). The fees are calculated on quarterly disbursements. Congress amended the fee schedule effective January 1, 2018 (with retroactive fixes for cases affected by Siegel v. Fitzgerald, 596 US 464 (2022), which invalidated a period of disparate treatment between UST districts and Bankruptcy Administrator districts in North Carolina and Alabama).

Quarterly Disbursements Quarterly UST Fee (post-2021 schedule)
Less than $15,000 $250
$15,000 to $74,999 $500
$75,000 to $149,999 $750
$150,000 to $224,999 $1,500
$225,000 to $299,999 $1,750
$300,000 to $999,999 $4,875
$1,000,000 to $1,999,999 $6,625
$2,000,000 to $2,999,999 $9,825
$3,000,000 to $4,999,999 $13,000
$5,000,000 to $14,999,999 $20,000
$15,000,000 to $29,999,999 $30,000
$30,000,000 or more 0.8% of disbursements, capped at $250,000 per quarter

Big-case UST fees add up fast. A DIP running $50 million in quarterly disbursements pays $250,000 per quarter, or $1 million per year, purely to keep the case moving. In WeWork’s case, quarterly disbursements ran into hundreds of millions, generating the maximum $250,000 per quarter fee for eight consecutive quarters.

Source: 28 USC §1930, Cornell LII; Chapter 11 Quarterly Fees, US Trustee Program; Siegel v. Fitzgerald, 596 US 464 (2022).

Fiduciary Duties to the Estate

The Supreme Court described the DIP’s fiduciary role in Commodity Futures Trading Comm’n v. Weintraub, 471 US 343 (1985): “the willingness of courts to leave debtors in possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.” Those duties include (1) preserving and maximizing the value of the estate, (2) treating creditors and equity holders equitably, (3) avoiding self-dealing, (4) disclosing conflicts, and (5) complying with all court orders and reporting obligations.

Breach of fiduciary duty by a DIP’s officers or directors can lead to (1) appointment of a Chapter 11 trustee under §1104(a)(1) for “cause, including fraud, dishonesty, incompetence, or gross mismanagement,” (2) personal liability for the officers, and (3) claims for equitable subordination of insider claims under §510(c). The Weintraub standard is why counsel for a DIP repeatedly emphasizes to management that they now serve creditors first, not shareholders.

Source: CFTC v. Weintraub, 471 US 343 (1985).

Restrictions and Court Approval Requirements

A DIP is not a monarch. Every material decision outside the ordinary course of business needs court approval after notice and a hearing. Rule 2002 sets the standard 21-day notice period for most motions. Rule 4001 governs cash collateral, DIP financing, and stay relief motions, with special interim-hearing procedures allowing action within 3 to 14 days if the debtor shows immediate and irreparable harm.

Actions requiring court approval typically include:

The DIP also has restrictions on paying prepetition claims. The general rule is that prepetition unsecured claims cannot be paid before plan confirmation. “First day” motions typically seek limited exceptions for critical vendors, employee wages, benefits, and taxes under §507(a) priorities and the doctrine of necessity, but these payments are scrutinized by the US Trustee and creditor committees.

When a Chapter 11 Trustee Displaces the DIP (§1104)

Section 1104 allows the court, on request of any party in interest or the US Trustee, to appoint a Chapter 11 trustee to replace the DIP. The two grounds are:

  1. Cause under §1104(a)(1), “including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause.”
  2. Interests of creditors and equity holders under §1104(a)(2), a broader standard that has been used where management has serious conflicts of interest or has lost creditor confidence.

Trustee appointments are rare. The presumption is that management stays. When they happen, the case usually becomes a Chapter 7-like liquidation or a fast §363 sale. Recent examples include Purdue Pharma (never converted, but faced repeated trustee motions), FTX (an examiner and later independent directors, not a trustee, but functionally similar), and Neiman Marcus (2020, resolved through management change rather than trustee appointment). Section 1104(c) also allows appointment of an examiner, a lower-intrusion alternative that investigates management without displacing it.

Source: 11 USC §1104, Cornell LII.

Small Business Debtors and Subchapter V

The Small Business Reorganization Act of 2019 (effective February 19, 2020) created Subchapter V of Chapter 11, a streamlined path for small business debtors. Sub V includes an important quirk: even though a Sub V debtor holds DIP status, §1183 requires appointment of a Subchapter V trustee in every case. The Sub V trustee does not displace the debtor from possession or management, but does facilitate a consensual plan, oversee distributions, and may take on operational duties if the debtor is removed for cause.

Debt-limit eligibility for Sub V was raised to $7.5 million (aggregate noncontingent liquidated secured and unsecured debt) by the CARES Act in 2020, extended by the COVID-19 Bankruptcy Relief Extension Act, then again by the Bankruptcy Threshold Adjustment and Technical Corrections Act of 2022. That higher limit expired June 21, 2024, and the eligibility ceiling reverted to $3,024,725 (as inflation-adjusted per §104). Efforts to reinstate the $7.5 million ceiling remained pending in Congress as of mid-2026.

Sub V DIPs get several benefits standard Chapter 11 DIPs do not: no creditor committee unless the court orders one, no US Trustee quarterly fees under §1930(a)(6) (Sub V debtors pay a flat trustee fee instead), a 90-day plan filing deadline, and the ability to confirm a plan over creditor objection without meeting the absolute priority rule, so long as the debtor devotes all “projected disposable income” for three to five years to unsecured creditors under §1191(c). Sub V trustee fees are typically capped at $60 per hour to $10,000 per case, far cheaper than a Chapter 11 trustee under §326.

Source: Subchapter V, Cornell LII; Bankruptcy Threshold Adjustment and Technical Corrections Act, Congress.gov.

Real 2023 to 2026 DIP Cases: What Powers Looked Like in Practice

Statutes read differently once you see them deployed. The table below shows how six major Chapter 11 debtors used their §1107 powers between 2023 and early 2026.

Debtor Petition Date Key DIP Powers Used Outcome
Bed Bath & Beyond April 23, 2023 §363 sale of Buybuy Baby, IP sale to Overstock, §365 rejection of 480 leases, §364 DIP loan of $240M from Sixth Street Full liquidation of retail operations, brand sold, plan of liquidation confirmed 2024
WeWork November 6, 2023 §365 lease renegotiation eliminating approximately $12B in future rent, $683M DIP from Goldman Sachs, §363 stalking horse sale process Emerged June 2024 as private company under Anant Yardi ownership
Yellow Corp August 6, 2023 §363 sale of terminals to Estes Express and XPO for $1.9B+, DIP from Citadel and MFN Partners, §365 rejection of collective bargaining agreements (contested) Liquidation, wind-down of Teamsters-organized LTL trucking operations
Rite Aid October 15, 2023 (refiled May 5, 2025) §363 sales of hundreds of stores, $3.45B DIP financing, §365 rejection of 500+ leases across both cases, avoidance action reserves Emerged September 2024, refiled 2025 for asset sale liquidation
SVB Financial Group March 17, 2023 §363 sales of SVB Capital and SVB Securities to insider-led groups, $95M DIP, litigation against the FDIC over $1.9B in seized deposits Plan confirmed 2024, litigation ongoing
Spirit Airlines November 18, 2024 $300M DIP from PIMCO and UBS AM, §365 assumption of aircraft leases, prepackaged plan converting $795M of debt to equity Emerged March 2025 as private company, still operating

Sources: SEC EDGAR filings for each debtor; Kroll Restructuring Administration and Stretto claims-agent dockets; The Wall Street Journal and Reuters case coverage 2023 to 2026.

Key Case Law Every DIP Should Know

A handful of Supreme Court and circuit-level decisions shape what a DIP can and cannot do in practice. Any officer stepping into DIP shoes should be briefed on these.

Circuit-level authority worth flagging: In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983), setting the business-judgment standard for §363 sales; In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004), narrowing “critical vendor” first-day payments; and In re Grumman Olson Industries, 467 BR 694 (SDNY 2012), on successor liability limits in §363 sales.

Source: Bankruptcy Basics, US Courts; American Bankruptcy Institute case law resources.

How Long DIP Status Lasts

DIP status persists until one of four terminating events. The median Chapter 11 case in 2024 for public companies with more than $500 million in assets took 129 days from petition to plan confirmation, per the UCLA-LoPucki Bankruptcy Research Database. Prepackaged and pre-negotiated cases are much faster (30 to 90 days). Free-fall cases and large complex Chapter 11s can run 12 to 36 months. In extreme cases (asbestos and mass tort trusts, for example), DIP status has lasted five years or more.

The four terminating events:

  1. Plan confirmation and effective date. The DIP becomes the “reorganized debtor” and Chapter 11 protection ends per §1141. Assets vest in the reorganized debtor free and clear of claims other than as provided in the plan.
  2. Conversion to Chapter 7. Under §1112(a) (voluntary) or (b) (for cause). A Chapter 7 trustee is appointed and takes possession. DIP status ends immediately.
  3. Appointment of a Chapter 11 trustee. Under §1104. The trustee takes possession; management continues to run day-to-day operations at the trustee’s direction (or is replaced).
  4. Dismissal of the case. Under §1112(b) or §305. Rare but possible where Chapter 11 was filed in bad faith or the debtor cannot fund a case.

Tax and Employment Obligations During DIP Period

Chapter 11 does not suspend tax or employment law. A DIP must continue to:

The DIP that stops paying trust fund taxes, plan contributions, or WARN Act notices is inviting a trustee motion and personal exposure for officers.

Source: Chapter 11 Bankruptcy Reorganization, IRS; WARN Act, US Department of Labor; Plan Terminations, PBGC.

Practical Implications for Sellers, Buyers, and Creditors in Distressed M&A

DIP status changes the deal geometry of a distressed sale. For sellers (existing management and equity), a §363 sale can preserve some going-concern value that a Chapter 7 fire sale would destroy, though shareholders almost always get wiped out. For buyers, purchasing in a §363 sale delivers assets free and clear of most liens and claims under §363(f) and equitable mootness protection under §363(m), which is why strategic and financial buyers pay meaningful premiums for court-approved sales over out-of-court receivership deals.

For creditors, the DIP posture affects recoveries in specific ways. Secured creditors face potential priming under §364(d) but are protected by adequate protection under §361. Unsecured creditors typically negotiate through a Creditors’ Committee funded by the estate under §1103, with counsel selected by the committee. Trade creditors sometimes get “critical vendor” treatment in first-day orders, though the doctrine has been narrowed since In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004). Equity holders are usually out of the money and negotiate through a §1102(a)(3) equity committee if one is appointed (rare).

A common trap in distressed M&A: buyers assume that “buying out of bankruptcy” means no successor liability. Section 363(f) does clear most in rem claims, but successor liability under federal environmental law (CERCLA), certain tort claims, and product liability claims can survive a §363 sale in some jurisdictions. See Grumman Olson Industries, 467 BR 694 (SDNY 2012), and the ongoing product liability disputes in cases like Purdue Pharma. Due diligence in a §363 sale still matters.

If your business is heading toward distress, a material adverse effect analysis in your existing purchase agreements, indenture covenants, or credit facility becomes urgent, and the timing of a §363 sale relative to any change-of-control triggers deserves early legal review.

How CT Acquisitions Approaches Distressed Sell-Side Mandates

Most distressed businesses do not need bankruptcy counsel first. They need honest advice on whether a solvent M&A process can still capture value before covenants trip. CT Acquisitions handles lower-middle-market sell-side engagements for owners in the $5 million to $50 million enterprise-value range, including businesses under working capital pressure, covenant stress, or looming lender maturity issues.

Where the situation is truly Chapter 11 bound, we work alongside restructuring counsel and often stalking-horse bidders to run a §363 marketing process that clears court under the In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983), business-judgment standard. Where a solvent process is still viable, we run a private-market outreach to strategic and financial buyers that avoids the equity destruction and cost of bankruptcy entirely.

What is different about how CT approaches these mandates:

If you are considering a sale and there are early distress signals (lender letters, EBITDA decline, covenant tightening, customer concentration events), schedule a 30-minute exit-readiness call at ctacquisitions.com/contact-us/. Our sell-side advisory overview and M&A advisor role guide explain how the engagement typically runs.

Frequently Asked Questions

What does it mean to be a debtor in possession?

Being a debtor in possession means a person or company has filed for Chapter 11 bankruptcy and continues to operate the business and manage the estate under 11 USC §1107, exercising nearly all of a Chapter 11 trustee’s powers. Existing management stays in charge. The DIP owes fiduciary duties to creditors, files monthly operating reports with the US Trustee, and must obtain court approval for any material action outside the ordinary course of business.

What is the difference between a debtor and a debtor in possession?

A “debtor” is anyone who owes money or has filed a bankruptcy petition under any chapter. A “debtor in possession” is a narrower term that applies only in Chapter 11 (or Chapter 12 for family farmers) and describes a debtor that continues to hold and control estate property. In Chapter 7, a trustee takes possession immediately, so there is no debtor in possession. In Chapter 13, the debtor keeps property but is not called a DIP because different provisions govern.

Who is considered a debtor in possession?

Any Chapter 11 filer becomes a debtor in possession the moment the petition is filed, unless a Chapter 11 trustee is appointed. That includes corporations, LLCs, partnerships, individuals, and Subchapter V small business debtors. Sub V debtors are DIPs even though a Subchapter V trustee is also appointed under §1183. Individuals must meet debt-limit eligibility if they file under Chapter 13 instead. Insurance companies, banks, and certain other regulated entities are excluded from Chapter 11 under §109(b) and (d).

What are the duties of a debtor in possession?

A DIP owes the estate fiduciary duties of loyalty and care, must file monthly operating reports, pay quarterly US Trustee fees under 28 USC §1930(a)(6), maintain adequate insurance, continue payroll tax withholdings and remittances, comply with all court orders, and disclose conflicts. Section 1107 gives the DIP the trustee’s duties under §1106 except investigating itself. Failure to perform these duties can lead to appointment of a Chapter 11 trustee, conversion to Chapter 7, or personal liability for officers.

Can a debtor in possession get a loan?

Yes. Section 364 of the Bankruptcy Code authorizes post-petition financing, commonly called DIP financing. Unsecured credit in the ordinary course requires no approval. Priority credit, secured credit, and priming liens require court approval after notice and a hearing under Bankruptcy Rule 4001(c). Interim orders can approve emergency financing within 3 to 14 days, with final orders 21 to 45 days later. DIP loans typically carry SOFR plus 700 to 1,200 basis points in the 2024 to 2026 market, plus origination fees of 2 to 5 percent.

How long does a debtor in possession last?

DIP status begins with the Chapter 11 petition and ends when one of four things happens: plan confirmation and effective date, conversion to Chapter 7, appointment of a Chapter 11 trustee under §1104, or dismissal of the case. Prepackaged Chapter 11 cases can end DIP status in 30 to 90 days. Median public-company Chapter 11 cases run around four to five months. Complex or contested cases can last one to three years, and mass tort cases (asbestos, opioid) sometimes stretch past five years.

Can a debtor in possession sell the company?

Yes, and this is one of the most-used DIP powers. Section 363(b) authorizes sales of estate property outside the ordinary course of business subject to notice, a hearing, and the business-judgment standard set out in In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983). Sales under §363(f) transfer assets free and clear of most liens and claims. Stalking-horse bidder protections, competitive auction procedures, and 21-day notice under Bankruptcy Rule 2002 are standard. Many large Chapter 11s today are effectively §363 sale processes rather than reorganization cases.

What happens if a debtor in possession fails its duties?

Failure by a DIP triggers escalating remedies. Common consequences include appointment of a Chapter 11 trustee under §1104(a)(1) for cause (fraud, dishonesty, incompetence, gross mismanagement), appointment of an examiner under §1104(c), conversion of the case to Chapter 7 under §1112(b), dismissal, and personal liability for officers and directors for breach of fiduciary duty. Trust-fund payroll tax failures can also trigger personal §6672 assessment against responsible persons. The US Trustee is the party most likely to bring these motions when reporting or fee obligations lapse.

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