What is Debtor-in-Possession (DIP)?

Debtor in possession (DIP) is a term used in bankruptcy law to refer to a debtor (an individual or a company) that retains control of their assets and continues to operate their business while in the process of reorganizing under Chapter 11 bankruptcy protection in the United States. This is a unique feature of Chapter 11 bankruptcy, as opposed to other types of bankruptcy where a trustee is appointed to oversee and manage the debtor’s assets.

When a debtor files for Chapter 11 bankruptcy, they are granted an automatic stay, which prevents creditors from taking collection actions against the debtor. As a debtor in possession, the debtor is allowed to continue running the business and maintain control over its operations and assets, with certain restrictions and oversight by the bankruptcy court and other parties involved in the case, such as the creditors’ committee.

During this time, the debtor in possession is tasked with formulating a reorganization plan to address the outstanding debts and restructure the business in a way that makes it viable in the long run. The debtor may also seek financing, known as debtor-in-possession financing (DIP financing), to support the ongoing operations and fund the reorganization process.

Once the reorganization plan is approved by the bankruptcy court and the creditors, the debtor can emerge from bankruptcy, often with reduced debts and a more sustainable business model.

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