Definition
A Debtor in Possession (DIP) is a term used in U.S. bankruptcy law to describe a debtor who retains control of their property and continues to operate a business while undergoing a Chapter 11 bankruptcy process. The debtor has possession of assets and functions in much the same capacity as before the bankruptcy, but operates under the oversight and jurisdiction of the bankruptcy court.
DIPs are responsible for accounting for property, examining and objecting to claims, and filing informational reports as required by the court. This status is critical to allow the business to attempt financial restructuring with the goal of returning to profitability and resolving insolvency issues.
Examples
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Retail Store Chain Reorganization:
- A large retail store chain facing financial difficulties may file for Chapter 11 bankruptcy. As a debtor in possession, the chain might continue operating its stores, selling goods, paying employees, and serving customers while it restructures its debts under court supervision.
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Tech Startup Adjustment:
- A growing tech startup overextended itself financially. By declaring Chapter 11, it becomes a debtor in possession. The startup can continue developing its products and services while simultaneously renegotiating payment terms with creditors.
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Restaurant Chain Bankruptcy:
- Bite & Die Diners, a nationwide restaurant chain, filed for Chapter 11 bankruptcy. Despite their financial troubles, they continued to serve customers as a debtor in possession, hoping to attract a buyer or restructure their debts to stay in business.
Frequently Asked Questions (FAQs)
What is the role of a debtor in possession in a Chapter 11 case?
A debtor in possession operates the business and manages its assets during the Chapter 11 bankruptcy case. This includes duties such as maintaining insurance, paying taxes, overseeing all business operations, and complying with applicable laws and court orders.
How does debtor in possession financing work?
Debtor in possession financing (DIP financing) involves obtaining new credit to fund business operations during the bankruptcy process. Lenders are often given priority over existing debts, ensuring that they have a high likelihood of being repaid.
Can a debtor in possession sell property?
Yes, a debtor in possession can sell property. However, they typically need court approval to do so, especially if the sale involves significant assets.
Are there any risks to being a debtor in possession?
Yes, risks include failing to meet judicial requirements, inability to negotiate favorable terms with creditors, or further financial decline, leading to liquidation under Chapter 7.
How long does debtor in possession status last?
Debtor in possession status lasts until the bankruptcy reorganization plan is confirmed, the case is converted to another chapter (like Chapter 7), or the debtor’s assets are liquidated.
Can a debtor in possession continue normal operations?
Yes, the primary goal of Chapter 11 is to allow the debtor to continue normal business operations while developing a plan to reorganize and pay off creditors.
Related Terms with Definitions
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Bankruptcy Trustee: An individual appointed to oversee and manage the bankruptcy case, sometimes replacing the debtor in possession if so ordered.
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Automatic Stay: A court order that immediately stops most creditors from collecting debts from the debtor once a bankruptcy petition is filed.
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Chapter 11 Bankruptcy: A chapter of the United States Bankruptcy Code permitting reorganization under the bankruptcy laws of the United States.
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Creditor Committee: A group of unsecured creditors that represent the interests of all unsecured creditors in a Chapter 11 case.
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Preference Action: Actions by a trustee to recover payments or transfers made shortly before the bankruptcy filing deemed unfair to other creditors.
Online Resources
- U.S. Courts: Understanding Chapter 11
- American Bankruptcy Institute
- Justice.gov: Chapter 11 - Bankruptcy Basics
References
- United States Bankruptcy Code, Title 11 of the United States Code
- “Chapter 11 Bankruptcy and Restructuring Strategies,” 2021, PLI
Suggested Books for Further Studies
- “Chapter 11: Reorganizing American Businesses” by Elizabeth Warren
- “The Law of Debtors and Creditors: Text, Cases, and Problems” by Elizabeth Warren and Jay Lawrence Westbrook
- “Bankruptcy and Insolvency Accounting, Practice and Procedure” by Grant W. Newton
