Legal Definitions - DIP

The term DIP stands for Debtor-in-Possession.

In bankruptcy law, particularly under Chapter 11 reorganization, a Debtor-in-Possession is a business or individual that has filed for bankruptcy but is allowed by the court to retain control over its assets and continue operating its business. Instead of a separate trustee being appointed to manage the company's affairs, the existing management or individual debtor assumes the legal duties and powers of a trustee. They operate under the supervision of the bankruptcy court and with a fiduciary duty to the creditors. This arrangement allows the debtor to reorganize its finances while maintaining day-to-day operations.

• Example 1 (Corporate Reorganization): A struggling regional airline files for Chapter 11 bankruptcy to restructure its significant debt. Rather than a court-appointed trustee taking over, the airline's current CEO and executive team are designated as the Debtor-in-Possession. They continue to manage flight operations, employee payroll, customer service, and negotiations with aircraft lessors, all while working with the bankruptcy court to develop a plan to repay creditors and return the company to profitability.

  Explanation: This illustrates how the existing management (the debtor) remains "in possession" of the business and continues to operate it, fulfilling the role of a trustee under court supervision, rather than being replaced by an external party.

• Example 2 (Small Business Reorganization): A popular local restaurant chain, facing overwhelming debt from a rapid expansion, files for Chapter 11. The owner, who has built the business from the ground up and possesses unique operational knowledge, is permitted to continue managing the restaurants, overseeing staff, ordering supplies, and serving customers. As the Debtor-in-Possession, the owner must now also provide regular financial reports to the bankruptcy court and a committee representing creditors, demonstrating progress toward a viable reorganization plan.

  Explanation: Here, the individual owner of the small business acts as the Debtor-in-Possession, maintaining operational control and trustee-like duties under court oversight, leveraging their specific expertise to try and save the business.

• Example 3 (Individual with Business Assets): A sole proprietor who owns and operates a successful consulting firm files for Chapter 11 bankruptcy due to personal guarantees on a failed real estate investment. The court allows the individual to continue running their consulting business, managing client contracts, and overseeing employees. In this capacity, the individual is the Debtor-in-Possession, responsible for preserving the value of the consulting firm's assets and generating income to fund their reorganization plan, all while under the watchful eye of the bankruptcy court.

  Explanation: This example demonstrates how an individual debtor, particularly one with significant business assets, can be designated as a Debtor-in-Possession, continuing to manage their professional enterprise and its assets while working through bankruptcy.