What does debtor in possession mean

The essential advantage of being a debtor in possession is being able to continue operating the organization. Also, a debtor in possession may be able to obtain debtor-in-possession financing that would be impossible for any other party to obtain.

It may also be possible for a debtor in possession to buy property back from creditors, with the approval of the bankruptcy court. A debtor in possession will find that its decision-making is constrained by the bankruptcy court, since it must gain advance approval from the court for a variety of decisions. These approvals are needed to pay off debts, use assets as collateral, and pay professional advisors. Also, if the court does not approve of the actions of the debtor in possession, it can replace the debtor in possession with a trustee.

Other spending is carefully regulated. For example, the debtor usually cannot pay off debts that arose before filing for bankruptcy. Debt payments that are permissible under the Bankruptcy Code or approved by the court are the exceptions. The DIP also cannot put up company assets as collateral or employ and pay professionals without court permission. Similarly, unless the court rules otherwise, federal, state, and local tax returns must continue to be filed when due, or with extensions sought by the DIP as needed.

The DIP also needs to maintain adequate insurance on estate assets—and to be able to document that coverage—and must provide periodic reporting on the financial health of the business. Should the debtor not meet these obligations, or fail to follow court orders, the DIP designation can be terminated, after which the court will appoint a trustee to manage the business.

That step can make it more difficult for the debtor to salvage its enterprise and deal with its debts. Small Business Regulations. Debt Management. Student Loans. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. During the reorganization process, the bankruptcy court allows the business to secure additional financing from lenders in order to continue its operation. Under the jurisdiction of the bankruptcy court, such post-bankruptcy lenders assume a senior position on liens and security interests in the business assets, normally by consent of the pre-bankruptcy senior lenders.

DIP financing is important since it extends a lifeline to any business under Chapter 11 bankruptcy , enabling it to maintain payroll and suppliers, stabilize operations , restructure its balance sheet, and eventually repay creditors and recover from bankruptcy.

A business in bankruptcy can usually obtain DIP financing only by giving its post-bankruptcy lenders a senior lien position.

While a senior lien position ensures that the lender will be repaid fully, even in the case of liquidation, it also limits the business with strict payment terms, which can slow the reorganization process. Strict oversight by the bankruptcy court serves as an additional protection to DIP financing lenders, helping to make sure that new credit can be extended to businesses in bankruptcy. Current lenders usually have to agree to the terms, particularly in taking a back seat to a lien on assets.

The approved budget is an important aspect of DIP financing. The "DIP budget" can include a forecast of the company's receipts, expenses, net cash flow, and outflows for rolling periods.

It must also factor in forecasting the timing of payments to vendors, professional fees, seasonal variations in its receipts, and any capital outlays. Once the DIP budget is agreed upon, both parties will agree on the size and structure of the credit facility or loan. This is just a part of the negotiations and legwork necessary to secure DIP financing. DIP financing is frequently provided via term loans. Such loans are fully funded throughout the bankruptcy process, which means higher interest costs for the borrower.

Formerly, revolving credit facilities were the most utilized method, which allows a borrower to draw down the loan and repay as needed; like a credit card. This allows for more flexibility and therefore the ability to keep interest costs lower, as a borrower can actively manage the amount of the loan borrowed.

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