Debtor in Possession – Definition

Cite this article as:"Debtor in Possession – Definition," in The Business Professor, updated July 30, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/debtor-in-possession-definition/.

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Debtor in Possession (DIP) Definition

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 a special kind of coverage designed for persons or companies in financial distress. A company or an individual that has filed the Chapter 11 Bankruptcy protection is allows to hold and control a property to which a creditor has a legal claim over. Under this protection, such a company or individual can retain control and continue doing business with the assets, this protection does not exempt the person or company from tax payments.

A Little More on What is a Debtor in Possession (DIP)

Before an individual or company can enjoy the benefits or status of a Debtor in Possession (DIP), he must file for Chapter 11 bankruptcy. Filing for DIP also entails that previous bank accounts are close while new ones enrolling the status of the person as a DIP is opened.  There are certain rights that a company or an individual enjoy as a debtor in possession (DIP). the most important benefit is the right to retain control over an asset while the creditor still has legal ownership of the asset.

However, despite these benefits, DIP actions and status are subject to the regulations of the court. A company with a DIP status can also secure financial assistance that will ensure the solvency of the company until the financial disaster is over.

A company or individual with the status of debtor in Possession (DIP) has certain obligations. They are;

  • 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 obligation sor follow court orders will cause the DIP status to be retrieved or terminated.

Reference for “Debtor in Possession (DIP)”

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