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:
-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.