debtor in possession

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A debtor in possession (DIP) is an individual or corporation that has filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code and holds property or assets which can be used to satisfy creditor claims. The debtor in possession may continue to do business using those assets to maintain the asset productivity, but the debtor is doing so on behalf of creditors. Thus, the debtor essentially works as a trustee. The court in certain situations may appoint a trustee, but under Chapter 11 a trustee is not mandatory. 

The debtor in possession’s activities are monitored by a committee of unsecured creditors. If the committee loses confidence in the debtor’s asset management, the committee can ask the court to appoint a trustee. A debtor in possession must seek court approval to use the assets for any actions that fall outside the scope of regular business activities, and must also keep precise financial records, file appropriate tax returns, and maintain insurance on the assets.

Under Chapter 11 of the Bankruptcy Code, debtors can reorganize or reconstruct the assets to pay their debts to creditors. The debtor in possession has an exclusivity period of 120 days from the bankruptcy filing date to propose a reconstruction plan. During this exclusivity period, all of the creditors and security holders need to negotiate with the debtor in possession for a plan.  If the reconstruction plan proposed by the debtor in possession is confirmed by the court, and the debtor follows the plan for 3 to 5 years, depending on the court’s decision, the debts will be discharged.

[Last updated in September of 2022 by the Wex Definitions Team]