What is a 'Debtor in Possession (DIP)'

A debtor in possession (DIP) is a person or corporation that has filed for bankruptcy protection but still holds property to which a creditor has a right. It is part of U.S. bankruptcy law and is the term used to describe a corporation that continues to do business while under Chapter 11 bankruptcy proceedings. Creditors to a debtor in possession have a legal claim to their assets and property under a lien or other security interest. The DIP continues to run the business and has the power and obligation of a trustee to operate in the best interest of any creditors. A DIP can operate in the ordinary course of business, but is required to seek court approval for any actions that fall outside of the scope of regular business activities. The DIP must also keep precise financial records, insure any property and file appropriate tax returns.

BREAKING DOWN 'Debtor in Possession (DIP)'

After filing for Chapter 11 bankruptcy, new bank accounts are opened that name the debtor in possession on the account. A debtor in possession can be terminated and the court will appoint a trustee in the event that assets are improperly managed or the debtor in possession is not following court orders. The United States Trustee's office maintains guidelines that specify the duties of a debtor in possession.

In some cases, a debtor in possession it able to obtain financing after filing Chapter 11 bankruptcy. Such debtor-in-possession financing (DIP financing) can help a debtor keep a business running until it can be sold.

A debtor in possession can sometimes retain property by paying the creditor fair market value for it. For example, a debtor may seek to keep their personal car (a depreciated asset) so they can use it to work or find work to pay off the creditor. In such a case the debtor would need to pay fair market value of the car rather than a contract price, which tends to be higher because it factors in damages.

Debtor in Possession Guidelines

Below is a list containing general guidance and Chapter 11 debtor obligations provided by the U.S. Department of Justice:

  • The debtor is required to comply in all respects with Title 11 of the United States Code (the “Bankruptcy Code”), the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) and the Local Rules of Practice for the United States Bankruptcy Court.

  • The debtor shall appear at or participate in the initial debtor interview prior to the Section 341(a) initial meeting of creditors and shall also appear at the Section 341(a) initial meeting of creditors.

  • The debtor must pay all obligations arising after the filing of the petition (“post petition”) in full when due.  This includes not only general business expenses, but all post-petition obligations in the ordinary course of business including but not limited to:
    -Wages
    -U.S. Trustee Quarterly Fees and Court Costs
    -FICA, both employee and employer share
    -Tax deposits withheld from wages
    -Any other taxes

  • The debtor may not pay pre-petition obligations except as allowed by the Bankruptcy Code or by order of the court.

  • The debtor shall obtain court approval to obtain secured credit and unsecured credit outside the ordinary course of business.

  • The debtor shall obtain court approval to use cash collateral.

  • The debtor shall obtain court approval to sell, use or lease property outside of the ordinary course of business.

  • The debtor shall obtain court approval to employ and pay professionals.

  • The debtor shall maintain adequate insurance on estate assets.

  • The debtor shall expeditiously close pre-petition banking/depository accounts and open banking/depository debtor-in-possession accounts.

  • The debtor shall timely file all federal, state and local tax returns when due, or shall procure an extension from the appropriate taxing authority, unless otherwise provided by applicable law or by order of the court.

  • Individual Chapter 11 debtors shall provide appropriate notices in connection with domestic support obligations to such claim holders and appropriate state agencies.

Debtors in possession have additional requirements related to insurance (and timely proof of insurance), and must provide periodic reporting.

RELATED TERMS
  1. Automatic Stay

    An automatic stay is a legal provision that temporarily prevents ...
  2. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  3. Bankruptcy Trustee

    Bankruptcy trustee is a person appointed by the United States ...
  4. Bankruptcy

    Bankruptcy is the legal proceeding involving a person or business ...
  5. Voluntary Bankruptcy

    Voluntary bankruptcy is a type of bankruptcy where an insolvent ...
  6. Stipulated Judgment

    A Stipulated Judgment is a court decision ordering a debtor to ...
Related Articles
  1. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  2. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  3. Personal Finance

    What Is Your Money Personality Type?

    Your money personality type helps you shape your approach to spending, saving and investing. Find out which of the five profile types fits your finances.
  4. Taxes

    Bankruptcy Filing Changes That Could Affect You

    When the economy is down, more people file for bankruptcy. Make sure you know about the changes that have been made to this process.
  5. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  6. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  7. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  8. Personal Finance

    How the debt collection agency business works

    Understanding how the debt collection business works will give you a better chance of coming out ahead if you ever have to tangle with a collection agent.
  9. Taxes

    How Long Bankruptcy Will Affect You

    How long will the sad chapter of bankruptcy impact the rest of your life?
RELATED FAQS
  1. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
  2. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  3. How can a creditor improve its Average Collection Period?

    Read about some of the ways that a business can improve its accounts receivable management practices to shorten its average ... Read Answer >>
Trading Center