Final answer:
A debtor in possession is a debtor who continues to run a business and carries out normal trustee functions during bankruptcy to reorganize debts while operating. This approach is more beneficial than shutting down since it allows for potential profitability and better returns for creditors.
Step-by-step explanation:
A debtor who continues to run a business and performs most of the functions that a trustee would normally perform in bankruptcy proceedings is called a debtor in possession. This arrangement is often utilized in Chapter 11 bankruptcy cases, allowing companies to continue their operations while they reorganize their debts. The purpose of allowing a business to operate in this way is to try and improve the company's financial situation without the added burden of completely shutting down and liquidating its assets.
Filing for bankruptcy allows firms to restructure their debts, potentially reducing their overall financial burden and finding a path to regain profitability. It is a strategic move that can permit a company to reorganize its debts and assets under court supervision. This process is beneficial not only to the company but also to its creditors, as it often results in higher returns than a straightforward liquidation.