Debtor-in-Possession (DIP)

A debtor-in-possession (DIP) is a company or individual that has filed for Chapter 11 bankruptcy protection and continues to operate the business while reorganizing its finances, rather than surrendering control to a court-appointed trustee. The debtor-in-possession status is the default in Chapter 11. Existing management retains authority to run daily operations, make business decisions, and manage assets under the supervision of the bankruptcy court. The business keeps its lights on while working out a plan to pay creditors over time.

Think of debtor-in-possession status as running a company with the bankruptcy court as a silent board member whose approval is required for anything outside ordinary operations.

Powers and Limitations of a Debtor-in-Possession

A debtor-in-possession holds most of the powers of a bankruptcy trustee under Section 1107 of the Bankruptcy Code. It can continue normal business operations, pay employees, honor existing contracts, and make ordinary course purchases without court approval.

Anything outside ordinary business requires court approval. Selling a major asset, entering a significant new contract, borrowing money, or settling a large claim all require a motion and a court hearing. Creditors have the right to object and can request the appointment of a trustee if management demonstrates gross mismanagement, fraud, or dishonesty.

Debtor-in-Possession Financing

When a company files Chapter 11, its existing credit facilities are typically frozen. Suppliers may demand cash on delivery. Lenders may refuse to advance new funds under old agreements. Debtor-in-possession financing addresses this by allowing the company to borrow new money specifically for the bankruptcy period.

Debtor-in-possession lenders receive super-priority status in the repayment waterfall. They get paid before all pre-petition creditors, which makes the loans attractive to specialty lenders despite the obvious risk. In return, borrowers accept tight covenants, high fees, and the lender's influence over the reorganization timeline. Major banks and private credit funds actively compete for debtor-in-possession lending mandates on large Chapter 11 cases.

Key Obligations the Debtor-in-Possession Must Meet

Maintaining debtor-in-possession status requires compliance with several ongoing obligations.

• Filing monthly operating reports with the U.S. Trustee Program detailing cash receipts, disbursements, and financial condition.
• Opening and maintaining designated debtor-in-possession bank accounts separate from any pre-petition accounts.
• Paying all post-petition taxes, employee obligations, and administrative expenses on time. Post-petition taxes that go unpaid can justify conversion to Chapter 7 or appointment of a trustee.
• Seeking court approval for any transaction outside the ordinary course of business.

When a Trustee Replaces the Debtor-in-Possession

Courts appoint a trustee to replace management when the evidence shows fraud, dishonesty, incompetence, or gross mismanagement. The FTX bankruptcy filed in November 2022 is a recent example: founder Sam Bankman-Fried was effectively removed from control within days of the filing, and a professional restructuring expert, John J. Ray III, was appointed to manage the estate. Ray famously described the financial controls at FTX as among the worst he had ever seen in his career.

Even absent misconduct, creditors can request a trustee appointment if they believe independent oversight would better protect their interests. The standard is a preponderance of evidence showing cause.

Sources

• https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics
• https://www.justice.gov/ust
• https://www.jonesday.com/en/insights/2025/01/cramdown-of-equity-in-chapter-11-plan-requires-assessment-of-equitys-value-to-satisfy-fair-and-equitable-standard