Acting as a trustee, the DIP continues to run the business, but must seek approval for anything that falls outside the scope of normal business activities. During this transitional period, the company attempts to salvage some of the value of its assets. If you’re considering filing for Chapter 11 bankruptcy, it’s essential to understand how DIP status works.
Definition and Example of Debtor in Possession
A debtor in possession is a person or corporation that has filed for Chapter 11 bankruptcy but has retained possession of assets that their creditors have a right to claim.
Acronym: DIP
Businesses file for Chapter 11 bankruptcy when they need debt relief. This bankruptcy comes with certain legal protections against creditors that allows businesses to reorganize. Essentially, businesses owners can restructure and attempt to retain legal rights to their assets, acting as a sort of trustee, called a debtor in possession. After filing for Chapter 11, a debtor in possession can continue operating the business, but they must act in the best interest of the company’s creditors. This reorganization is possible because a business exists as a separate entity from its owners and stockholders. So filing for Chapter 11 doesn’t put the personal assets of its stakeholders at risk, aside from their investment in company stock. After the company files for Chapter 11, the DIP acts as a fiduciary over the business and its assets. The DIP’s duties include accounting for all property and filing any financial reports required by the court or bankruptcy administrator. With the court’s approval, the DIP can employ accountants, attorneys, appraisers, and any other professionals needed to provide assistance. For example, if you owned a publishing company that was struggling to pay its bills, you could file for Chapter 11 bankruptcy to restructure your debt so you can manage it. Meanwhile, as a debtor in possession, you would likely keep your publishing facilities and continue to operate your business, even if your lenders had a lien on your assets.
How Does Debtor in Possession (DIP) Work?
Most business owners file for DIP status so they can continue operating their business and avoid selling off or liquidating the company. This move is also beneficial to its creditors, since a functioning business is more valuable than its individual assets. For example, let’s say your business ran into financial trouble during the COVID-19 pandemic, and you filed for bankruptcy. After receiving DIP status, you could continue to run your business and use company resources. In the meantime, you can propose a restructuring plan or look for a buyer willing to purchase your company. And while you’re able to continue using the business assets, it’s important to remember that you no longer technically own them. If you’re a sole proprietor, you might consider filing for Chapter 13 bankruptcy, which provides a path to restructure your personal and business debts.
Pros and Cons of Chapter 11 Bankruptcy
Pros Explained
The company can continue to operate: If you file for Chapter 11, you can stay in business and resume normal business operations.Provides relief from creditors: After filing for Chapter 11, your creditors are required to cease all debt collection activities.Can negotiate with creditors: As you restructure your business, you renegotiate your debt obligations with creditors.
Cons Explained
Comes with restrictions: The courts have the right to impose restrictions on the DIP.Can be lengthy and expensive: Filing for Chapter 11 can be complex, and it comes with a number of administrative and legal fees.
