What Is Debtor in Possession (DIP)?

Debtor in Possession (DIP) Explained in Less Than 5 Minutes

Definition
A debtor in possession (DIP) is a person or corporation that filed for Chapter 11 bankruptcy. However, they still have control of property that their creditors have a lien on, and they may continue to do business using those assets.
A couple consults with a lawyer.
Photo:

Maskot / Getty Images

A debtor in possession (DIP) is a person or corporation that filed for Chapter 11 bankruptcy. However, they still have control of property that their creditors have a lien on, and they may continue to do business using those assets.

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.

Note

Once a person or business files for Chapter 11, they have 120 days of “exclusivity” of their property as they negotiate with creditors on a reconstruction plan.

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.

Note

If you’re starting a business, consider setting up a Limited Liability Corporation (LLC) for the legal protections. If you operate as a sole proprietor, there’s no legal separation between you and the business, which puts your personal assets at risk.

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.

Note

A debtor in possession has an exclusivity period for 120 days after the bankruptcy filing as they propose a reconstruction plan, negotiating with creditors and equity security holders. Once the plan is approved by the court, the debtor must follow it.

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
  • The company can continue to operate

  • Provides relief from creditors

  • Can negotiate with creditors

Cons
  • Comes with restrictions

  • Can be lengthy and expensive

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.

Key Takeaways

  • A debtor in possession (DIP) is a person or corporation that recently filed for Chapter 11 bankruptcy.
  • The DIP retains possession of the property their creditors have a lien on, and continues to do business using their assets.
  • Chapter 11 is used to restructure a business so it can continue operating.
  • Filing for Chapter 11 provides relief from creditors, but it can be a lengthy and expensive process.
Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Courts. “Chapter 11 - Bankruptcy Basics.” Accessed Jan. 18, 2022.

  2. Legal Information Institute, Cornell Law School. “Debtor in Possession.” Accessed Jan. 18, 2022.

  3. Legal Information Institute, Cornell Law School. “Chapter 11 Bankruptcy.” Accessed Jan. 18, 2022.

  4. U.S. Courts. “Chapter 13 - Bankruptcy Basics.” Accessed Jan. 18, 2022.

Related Articles