What is a debtor in possession (DIP)?
A debtor in possession (PID) is a person or company who has filed for Chapter 11 bankruptcy protection, but who still has property to which creditors have a lien or a lien. ‘another security. A PID can continue to do business using these assets, but must seek court approval for any action that is outside the scope of normal business activities. The DIP must also keep accurate financial records, insure all assets, and file the appropriate tax returns.
Rights as Debtor in Possession (DIP)
The main advantage of DIP status is, of course, the ability to continue to manage a business, albeit with the power and the obligation to do so in the best interest of any creditor. After Chapter 11 bankruptcy, the debtor must close the bank accounts they used before filing and open new ones that name the DIP and their status on the account.
A company’s actions as a DIP are tightly regulated by the courts, but the statute may allow it to recover certain assets.
From that point on, a number of decisions that the debtor could have previously made alone must now be approved by a court. Provided they obtain this authorization, a DIP can however obtain financing from the debtor in possession (DIP financing) which can help maintain the solvency of the business until its sale.
A debtor in possession can sometimes even keep property by paying the creditor at fair market value, again if the court approves the sale. For example, a debtor may seek to buy back his personal car (a depreciated asset) so that he can use it for work or find work to reimburse the creditor.
Obligations as debtor in possession (DIP)
A debtor in possession must not only act in the best interest of the creditors, but also of the employees of the business. Wages must be paid and deductions must be made, withholding funds used to deposit taxes and pay both the employees and the employers of FICA.
Other expenses are tightly regulated. For example, the debtor cannot repay any debt contracted before filing for bankruptcy, unless it is authorized by the Bankruptcy Code or approved by the court. DIP also cannot pledge corporate assets or employ and pay professionals without the same authorization.
Likewise, unless the court decides otherwise, federal, state and local tax returns must continue to be filed when due, or with extensions requested by the PID if necessary. The DIP must also maintain adequate insurance on estate assets – and be able to document this coverage – and must provide periodic reports on the financial health of the business.
If the debtor does not fulfill these obligations or does not comply with court orders, the DIP designation can be terminated, after which the court will appoint a trustee to manage the business. This step can make it more difficult for the debtor to save his business and settle his debts.