Debtor in Possession (DIP)
Candlefocus EditorProsperous companies will often choose to become a debtor-in-possession in order to resolve a particular financial issue. When a debtor-in-possession enters into a reorganization process, they immediately suspend certain payment obligations, such as employee wages and rent. This suspension of payments allows the company to continue operating normally, prioritize their expenses, and develop a plan for reorganization.
With Chapter 11 Bankruptcy, the debtor-in-possession typically has full control of their business and assets throughout the proceedings. This means the debtor-in-possession has the authority to continue operations, modify financial terms and negotiate new contracts with creditors. The debtor-in-possession is also responsible for developing a feasible payment plan and proposing it to creditors. In some cases, the court will approve the plan, which allows the business to emerge from the bankruptcy proceedings.
However, the debtor-in-possession does not have unlimited power. Creditors can still make claims and eventually force the sale of some of the debtor-in-possession’s assets. If these assets are sold, the proceeds are dispersed to creditors. To ensure fairness and efficacy, an independent individual or organization known as a “trustee” is appointed to oversee the proceedings and ensure the debtor-in-possession takes necessary steps to resolve their financial troubles.
Becoming a debtor-in-possession is desirable only when it allows a viable organization to restructure its finances and continue operating. If a company can remain operational throughout the transition, it gives them the best chance of success. If the company is unable to reorganize their finances and get back on track, they can be forced to liquidate their assets, which almost always results in the company’s failure.