What is Debtor in Possession?
An Insight into Business Control During Bankruptcy
When a business files for Chapter 11 bankruptcy, it may qualify for a status known as Debtor in Possession (DIP). This term indicates that the debtor, or borrower—a person or business that owes money—continues to operate the business and maintain control of its assets. The core idea behind this is to allow the business to restructure and emerge stronger post-bankruptcy.
Responsibilities and Benefits of Being a Debtor in Possession
Being a debtor in possession comes with an array of responsibilities, which include accounting for property, managing the business operations effectively, filing the necessary periodic operating reports, and observing the restrictions placed by the bankruptcy court.
On the flip side, there are substantial benefits. The debtor has an opportunity to stay functional, attempt to recover, and develop a plan to reorganize the business. This ongoing operational control helps preserve jobs and generate revenue, which might ultimately thwart a total business shutdown.
An Illustrative Example: Resiliency in Action
Once Bite & Die Diners filed for Chapter 11 bankruptcy, their uncertainty turned into resilience. Even under financial distress, they continued to serve customers as a debtor in possession. By keeping restaurant operations alive, Bite & Die sustained customer loyalty and retained employee jobs, all while arranging a plausible reorganization plan for their business.
Frequently Asked Questions (FAQs)
**1. What privileges does a debtor in possession have?
A debtor in possession typically maintains control over business operations and properties, similar to executive powers they held prior to declaring bankruptcy. However, critical decisions need approval from the bankruptcy court.
**2. Can a debtor in possession take out new loans?
Yes, the debtor in possession can obtain new financing, termed as DIP financing, to facilitate continuous operations. Any new lending agreements must be approved by the bankruptcy court.
**3. What is the duration for which a company can remain a debtor in possession?
This status might persist through the entirety of the Chapter 11 bankruptcy process, which typically ranges from months to several years depending on the complexity of the case and provided that the company adheres to legal requirements set by the court.
**4. Who supervises the financial management of a debtor in possession?
The United States Trustee Program, a component of the U.S. Department of Justice, plays a significant role in overseeing the behavior and performance of the debtor to ensure compliance with proceedings.
Related Terms: Bankruptcy trustee, Chapter 7 bankruptcy, Bankruptcy court, Unsecured creditor, Secured creditor.
