The debtor in possession (DIP) is a person or company that has filed for bankruptcy under Chapter 11 of the Bankruptcy Code. However, they still control the property that creditors have a lien on, and they can continue to conduct business using those assets.
Definition and Example of Debtor in Possession
A debtor in possession is a person or company that has filed for bankruptcy under Chapter 11, but still retains the entitlement rights to the assets that creditors have a claim on. Business owners file for Chapter 11 bankruptcy when they need relief from debts. This bankruptcy comes with certain legal protections against creditors that allow companies to reorganize their affairs. Simply put, business owners can restructure and attempt to retain their legal rights to their assets, while acting as custodians of those assets, referred to as the debtor in possession.
How Does Debtor in Possession (DIP) Work?
Most business owners file for debtor in possession status so they can continue operating their business and avoid selling or liquidating the company. This step is also beneficial for creditors, as a functioning company is worth more than its individual assets.
The debtor in possession enjoys an exclusive 120-day period after filing for bankruptcy during which they propose a reorganization plan and negotiate with creditors and security holders. Once the plan is approved by the court, the debtor must adhere to it.
For example, let’s say you own a publishing company facing difficulties in paying its bills, you can file for bankruptcy under Chapter 11 to restructure your debts so that you can manage them. Meanwhile, as a debtor in possession, you are likely to retain your publishing facilities and continue to run your business, even if the lenders have a lien on your assets.
Advantages and Disadvantages of Chapter 11 Bankruptcy
Advantages:
- The company can continue to operate.
- Provides relief from creditors.
- Negotiations can be made with creditors.
Disadvantages:
- Comes with restrictions.
- Can be lengthy and costly.
In conclusion, the debtor in possession (DIP) is a person or company that has filed for bankruptcy under Chapter 11. The debtor in possession retains the entitlement rights to the property that creditors have a lien on, and continues to conduct business using those assets. Chapter 11 is used to restructure the company so it can continue to operate. Filing for bankruptcy under Chapter 11 provides relief from creditors, but it can be a long and expensive process.
Source: https://www.thebalancemoney.com/what-is-debtor-in-possession-dip-5216219
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