A debtor in possession (DIP) refers to person or company that has formally declared bankruptcy but nevertheless allowed by the bankruptcy court to remain in possession of assets in which creditors have a valid claim or legal right. Naturally, in allowing this leeway, the courts also impose strict responsibilities on the DIP. Nonetheless, it allows the debtor an opportunity to best resolve the situation, both for themselves and creditors. In practice, DIP status is mostly granted to corporations rather than natural persons.
For example, a corporation that continues to operate its businesses under Chapter 11 bankruptcy is, by definition, a DIP. In this context, the corporation has the right to submit a plan for reorganization, including refinancing with accounts receivable factoring. It is allowed to continue to manage its businesses without supervision by an appointed bankruptcy trustee. In technical terms, a DIP in the USA may be thought of as the legal name given to a firm that has filed for protection under Chapter 11 of the bankruptcy code and has been granted permission to continue operating its business acting, in effect, as its own bankruptcy trustee.
An entity that files a bankruptcy petition is, effectively, seeking protection by the court (that is, by the legal system) from creditors. The rights enjoyed by a DIP granted bankruptcy protection, as well as the rights of creditors dealing with a DIP, can vary between jurisdictions. Parties are commonly referred to specialist legal counsel in these circumstances.
In some cases, the DIP may be able to continue to possess an asset by acquiring it from a creditor at its assessed fair market value. This is perhaps particularly true if the debtor can establish that the asset is necessary to maintain employment in order to pay outstanding creditors.
Modern bankruptcy law exists to protect debtors from attack by creditors. It has its roots when commercial dealings in Florence during the 1400s and 1500s. In those days, bankrupt debtors had few rights. Disgruntled creditors regularly petitioned the courts to take seize all possessions of a bankrupt and have that individual thrown in jail with no opportunity to recover from the straitened circumstances.
Since those years, society attitudes and the legal system have progressively taken a more liberal attitude toward bankrupt debtors. Bankruptcy is now seen as an unavoidable consequence of modern business life. Commercial risk renders some bankruptcies an inevitable outcome, often more because of environmental situations rather than any personal failings. In order to encourage risk taking, the law has developed a framework to protect bankrupt debtors.
Today, the law recognizes that risk is an inevitable companion to modern commercial affairs. It acknowledges that situations will inevitably develop where a person will not be able to honor outstanding debt obligations. Accordingly, the law has established various protections to allow debtors an opportunity to recover from a situation of bankruptcy.
For example, a corporation that continues to operate its businesses under Chapter 11 bankruptcy is, by definition, a DIP. In this context, the corporation has the right to submit a plan for reorganization, including refinancing with accounts receivable factoring. It is allowed to continue to manage its businesses without supervision by an appointed bankruptcy trustee. In technical terms, a DIP in the USA may be thought of as the legal name given to a firm that has filed for protection under Chapter 11 of the bankruptcy code and has been granted permission to continue operating its business acting, in effect, as its own bankruptcy trustee.
An entity that files a bankruptcy petition is, effectively, seeking protection by the court (that is, by the legal system) from creditors. The rights enjoyed by a DIP granted bankruptcy protection, as well as the rights of creditors dealing with a DIP, can vary between jurisdictions. Parties are commonly referred to specialist legal counsel in these circumstances.
In some cases, the DIP may be able to continue to possess an asset by acquiring it from a creditor at its assessed fair market value. This is perhaps particularly true if the debtor can establish that the asset is necessary to maintain employment in order to pay outstanding creditors.
Modern bankruptcy law exists to protect debtors from attack by creditors. It has its roots when commercial dealings in Florence during the 1400s and 1500s. In those days, bankrupt debtors had few rights. Disgruntled creditors regularly petitioned the courts to take seize all possessions of a bankrupt and have that individual thrown in jail with no opportunity to recover from the straitened circumstances.
Since those years, society attitudes and the legal system have progressively taken a more liberal attitude toward bankrupt debtors. Bankruptcy is now seen as an unavoidable consequence of modern business life. Commercial risk renders some bankruptcies an inevitable outcome, often more because of environmental situations rather than any personal failings. In order to encourage risk taking, the law has developed a framework to protect bankrupt debtors.
Today, the law recognizes that risk is an inevitable companion to modern commercial affairs. It acknowledges that situations will inevitably develop where a person will not be able to honor outstanding debt obligations. Accordingly, the law has established various protections to allow debtors an opportunity to recover from a situation of bankruptcy.
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One small example of this principle in action is debtor in possession financings. These funding arrangements are provided to entities that have declared themselves bankrupt with accounts receivable factoring.
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