how debtor in possession dip works
debtor in possession dip is typically a transitional stage in which the debtor most often a business attempts to salvage value from assets after bankruptcy the most obvious reason for obtaining dip status is that the assets can be used as part of a functioning business with higher resale value than the assets themselves dip status lets bankrupt companies and individuals avoid liquidation at fire sale prices which benefits both the bankrupt party and their creditors consider a mom and pop restaurant that was forced into bankruptcy during a recession the restaurant may still have talented staff a good reputation and loyal customers these could all be more valuable to the right buyer than the restaurant s building and equipment however it may take months or even years to find that buyer a debtor in possession might be able to continue operating the restaurant until they find the right buyer alternatively debtor in possession status can be used to reorganize a business returning to the bankrupt restaurant example the owners could eventually find a local investor willing to buy their building and rent it back to them the funds from the sale might be used to pay off all their creditors and emerge from bankruptcy the restaurant would then be back in business on a different basis although dips often exercise substantial control over the assets in their possession it is essential to realize that they no longer own those assets creditors can ultimately use the courts to force a sale of the dip assets advantages of debtor in possession dip the key advantage to dip status is of course being able to continue running a business while with the obligation to do so in the best interest of any creditors a dip may also be able to secure debtor in possession financing dip financing that can help to keep the business afloat until it can be sold a debtor in possession can sometimes even retain property by paying the creditor its fair market value if the court approves the sale for example an individual debtor may seek to buy back their car so they can use it to work or find work to pay off the creditor the ability to continue doing business as a debtor in possession is naturally limited by the financial interests of creditors they will eventually demand to be paid and can force the sale of assets in the debtor s possession disadvantages of debtor in possession dip after filing for chapter 11 bankruptcy the debtor must close the bank accounts they used before the filing and open new ones that name the dip and their status on the account from that point on many decisions the debtor might previously have made alone must be approved by a court 1a debtor in possession must act in the best interests of creditors and in the case of a business its employees a business must pay wages make appropriate withholdings deposit the withheld taxes and pay both the employee and employer share of social security and medicare taxes or fica as before other spending is carefully regulated for example the debtor usually cannot pay off debts that arose before filing for bankruptcy unless doing so is permissible under the bankruptcy code or approved by the court 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 must also maintain adequate insurance on the assets and be able to document that coverage in addition it must provide periodic reporting on the financial health of the business 