Debtor in Possession (DIP)
What it is:
How it works (Example):
Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself. Instead of granting the creditors' claims from liens and security interests in the business assets and allowing them to take possession, the bankruptcy court allows the business to retain ownership and control of specific assets. During that time, the business must prepare a reorganization plan that proposes a method, an amount, and a timeframe by which it will pay its creditors.
If granted debtor-in-possession status by petition to the bankruptcy court, the business may use assets of the business, including vehicles, equipment, and plant to continue operations. In practice, the continued operations allow the debtor in possession to reorganize, reposition itself, and improve its chances of re-paying creditors, even while all of its finances fall under the strict supervision of the bankruptcy court.
Why it Matters:
Without use of its assets, a bankrupt business would not be able to operate. As a result, the company would be forced to layoff employees, which could easily to lead to loss of customers and revenues, and consequently the inability to repay creditors. Although debtor-in-possession status allows a bankrupt business to use its own assets to reorganize and repay creditors, at the same time it limits the freedom of such a business to leverage its assets with financing, for example, without the approval and supervision of the bankruptcy court.