Definition
A Debtor In Possession (DIP) is a term from bankruptcy law which refers to a business that continues to operate while under the Chapter 11 bankruptcy process. In this status, the debtor holds the assets and runs daily operations while under the protection of the bankruptcy court. The debtor maintains control of their assets until the court approves a reorganization plan, rejects it, or converts the case to a Chapter 7 liquidation.
Key Takeaways
- Debtor In Possession (DIP) is a term from bankruptcy law and refers to a bankrupt entity that remains in control of its property. Instead of assigning a trustee to manage the assets, the business or individual maintains them and can continue normal operations.
- DIP offers the entity an opportunity to reorganize their financial structure, repay outstanding debts and restore profitability while under the protection of Chapter 11 bankruptcy law. They are allowed to secure additional financing known as DIP financing, potentially with favorable terms, to keep their business running during the process.
- Whilst in DIP status, the entity is subject to increased scrutiny and oversight to ensure that they do not favor certain creditors over others. Any significant business decisions, such as the selling of assets, entering new contracts or shutting down operations, need court approval.
Importance
Debtor In Possession (DIP) is a crucial financial term particularly significant in bankruptcy proceedings.
It refers to a situation where an individual or corporation that has filed for Chapter 11 bankruptcy protection maintains control and possession of the assets on which a creditor has a lien.
This status is important because, during this period, the debtor has rights and abilities of a bankruptcy trustee, enabling them to operate the business and perform financial transactions as usual.
Moreover, they have an opportunity to restructure their business, settle their debts, and emerge from bankruptcy in a healthier financial state.
In essence, the presence of DIP in insolvency law allows companies to have a second chance while protecting the interests of creditors.
Explanation
Debtor in Possession (DIP) refers to an individual or corporation who has filed for bankruptcy protection, but still maintains control over their assets and operations. It’s fundamentally a unique component of the United States bankruptcy law, specific particularly to Chapter 11 bankruptcy proceedings.
The purpose of allowing the bankrupt entity to function as ‘Debtor In Possession’ is to smooth the process of reorganization, and making it less disruptive to the regular course of business operations, customers, and stakeholders. In a traditional bankruptcy process, a separate trustee is appointed to manage the debtor’s assets.
However, the DIP model permits the debtor to manage its own financial affairs and assets during the reorganization process under the bankruptcy court’s supervision. As a DIP, the debtor is afforded various privileges like raising ‘debtor-in-possession financing’, a form of superior financing to improve their financial condition.
The key motivating factor in behind using DIP is that it allows troubled corporations to continue operations, eventually returning to profitability while being shielded from creditors’ claims.
Examples of Debtor In Possession
Debtor in Possession (DIP) financing comes into play during bankruptcy procedures, specifically in Chapter 11 bankruptcies in the U.S. Here are three real-world examples:General Motors – In 2009, General Motors, the American automotive giant, filed for Chapter 11 bankruptcy. Given its size and importance to the American economy, the U.S. government provided DIP financing to GM. In this case, GM continued to operate its business and maintained control of its operations, while they developed and attempted to execute a plan to reorganize and stabilize.
American Airlines – American Airlines filed for Chapter 11 bankruptcy protection inA $
25 billion DIP financing was obtained from a group of creditors in order to keep the company running during its restructuring process. This enabled American Airlines to continue its business operations and emerge from bankruptcy successfully by merging with U.S. Airways.PG&E – Pacific Gas and Electric Co., California’s biggest utility provider, filed for bankruptcy in
The company secured commitments for over $12 billion in DIP financing from a consortium of banks to continue operating its services. By being a debtor in possession, they were able to keep serving millions of Californians with gas and electricity whilst remediating their financial difficulties.
FAQs for Debtor In Possession
1. What is a Debtor In Possession?
A Debtor in Possession is a term used in finance which refers to a person or corporation who has filed for bankruptcy, but still holds property to which creditors have a legal claim. This occurs under a Chapter 11 bankruptcy.
2. What rights does a Debtor in Possession have?
A Debtor in Possession has many of the same rights as an ordinary trustee in bankruptcy. These can include the right to handle daily operations, to enter into transactions, to use, sell, or lease property, among other rights, unless restricted by a bankruptcy court or judge.
3. What responsibilities does a Debtor in Possession have?
A Debtor in Possession has the responsibility of accounting for property, examining claims, and filing informational reports as required by the court and the U.S. trustee or bankruptcy administrator. The Debtor in Possession must also provide data concerning the business’s financial condition.
4. What happens if a Debtor in Possession fails to execute its responsibilities?
If a Debtor in Possession fails to fulfill his legal or financial responsibilities, a trustee may be appointed by the court to oversee the company’s operations or the company may be pushed into liquidation under Chapter 7 of the Bankruptcy Code.
5. Can a Debtor in Possession obtain credit?
Yes, a Debtor in Possession can obtain credit and incur unsecured debt necessary to run a business, if court approved. This will be considered an administrative expense and given priority over existing debts.
Related Entrepreneurship Terms
- Bankruptcy
- Reorganization Plan
- Creditors’ Committee
- Asset Liquidation
- Bankruptcy Court
Sources for More Information
- Investopedia – This comprehensive finance-focused website likely contains articles and definitions related to “Debtor In Possession”.
- Cornell Law School’s Legal Information Institute – This institute offers a broad range of legal definitions, including financial terms.
- JD Supra – This platform provides legal and financial news, commentary and analysis, often covering detailed topics such as “Debtor In Possession”.
- The United States Courts – The official website of U.S. Courts may provide legal context for the term “Debtor In Possession”, especially in relation to bankruptcy laws.
