Debtor in Possession - Definition
Written by Jason Gordon
Updated at July 7th, 2021
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What is a Debtor in Possession?
In the United States, the Corporate Bankruptcy law contains a provision for a debtor in possession (DIP). This provision is contained in Chapter 11 of the bankruptcy law. A debtor in possession refers to the debtor in a business bankruptcy. A company or an individual that has filed the Chapter 11 Bankruptcy protection is allowed to hold and control the property to which a creditor has a legal claim. Under this protection, the company can continue doing business with the assets.
Back To: COMMERCIAL LAW: CONTRACTS, PAYMENTS, SECURITY INTERESTS, & BANKRUPTCY
What are the limits on a Debtor in Possession?
A company or individual with the status of debtor in Possession (DIP) has certain obligations.
- A DIP must perform actions having the interest of the creditor at heart.
- It must act in the best interest of its employees.
- The DIP is obligated to keep precise financial records and file appropriate tax returns when necessary.
- No debt owed prior to the filing for a Chapter 11 bankruptcy can be paid by a DIP unless permitted by the court.
- The assets cannot be used as collateral for a business loan.
- The DIP must seek approval from the court before employing or paying its employees and professionals.
There are few other obligations as rolled out by the court. Failure to meet the obligations or follow court orders will cause the DIP status to be retrieved or terminated.