Debtor in Possession (DIP)

A debtor in possession (DIP) is a business or individual that has filed for Chapter 11 bankruptcy protection and remains in control of property that creditors have legal claims on (for example, via liens). The DIP can continue to operate and use those assets but must do so under court supervision and in the best interests of creditors.

Key takeaways

• DIP status typically appears in Chapter 11 reorganizations and lets the debtor operate while attempting to preserve or recover value from assets.
• The DIP retains operational control but not full ownership; creditors and the court have ultimate authority and can force asset sales.
• A DIP must follow strict reporting, insurance, tax, and spending rules and often needs court approval for major actions.

How DIP status works

DIP status allows a debtor to run the business or use assets during a bankruptcy process instead of immediately liquidating them at distressed prices. This can preserve value for creditors and increase the chance of a successful reorganization or sale.

Typical uses:
* Operate the business while seeking a buyer or investor.
* Reorganize operations and finances to emerge from bankruptcy (for example, selling an asset and using proceeds to pay creditors and continue operating on a new basis).

Example: A small restaurant with good staff and reputation may continue operating as a DIP while searching for a buyer, because the going-concern value may exceed what would be realized in a quick liquidation.

Obligations and restrictions

A DIP must:
* Keep accurate financial records and provide periodic reports to the court.
* Maintain adequate insurance on assets and document coverage.
* File required federal, state, and local tax returns (or timely request extensions).
* Open new bank accounts that identify the DIP status (closing pre-bankruptcy accounts).
* Seek court approval for actions outside ordinary-course operations (e.g., selling assets, borrowing, providing collateral, or hiring paid professionals).
* Act in the best interests of creditors (and employees, where applicable).

Creditors can challenge actions in court and may ultimately force a sale of DIP assets. If the DIP fails to meet obligations or comply with court orders, the court can terminate DIP status and appoint a trustee to manage the debtor’s affairs.

Advantages

• Allows continued operation of the business, preserving going-concern value.
• Provides time to find buyers or restructure in a way that maximizes recoveries for creditors.
• May permit access to debtor-in-possession (DIP) financing to maintain operations during the bankruptcy process.
• In some cases, the DIP can retain property by paying fair market value with court approval (e.g., buying back a vehicle needed for work).

Disadvantages

• Significant loss of autonomy: many decisions require court approval and must prioritize creditor interests.
• Spending and payments are tightly regulated; prebankruptcy debts generally cannot be paid without court authorization.
• Limits on encumbering assets, hiring and compensating professionals, and using company property as collateral without approval.
• Administrative burdens: enhanced reporting, tax compliance, insurance, and documentation requirements.
• Risk of losing DIP status and having a trustee appointed if obligations are not met.

Related Chapter 11 concepts

• Chapter 11: A form of bankruptcy focused on reorganization. Common for businesses, it lets debtors continue operating under court supervision while addressing debts. Individuals can also file Chapter 11, though other chapters are often used instead.
• Small business case: A simplified Chapter 11 pathway for businesses with debts of $3,024,725 or less (created by BAPCPA in 2005). Qualifying small businesses may use this or Subchapter V.
• Subchapter V: A streamlined Chapter 11 process for small businesses created by the Small Business Reorganization Act (SBRA) of 2019. It currently applies to businesses with debts of $7.5 million or less and aims to speed and simplify reorganization.

Bottom line

Debtor-in-possession status gives a bankrupt business or individual a controlled opportunity to preserve and maximize asset value while pursuing reorganization or sale. It provides important benefits—continued operation and potential access to financing—but comes with tight oversight, procedural obligations, and reduced autonomy to ensure fair treatment of creditors.