Debtor In Possession Lingo Expression Relating To Bankrupt Debtors

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Debtor in possession (DIP) is a highly specific legal concept used frequently by insolvency lawyers and insolvency practitioners. It refers to a natural person or corporation that has formally declared them self a bankrupt (that is, filed a bankruptcy petition) but remains in possession of assets upon which a creditor has some form of security interest (such as, for example a lien). In practice, the term is most often used in connection with a corporation rather than a natural person.

A company in the USA that continues managing its businesses under Chapter 11 is a DIP. In this situation, the company is required to submit a reorganization plan with factoring receivables. It is permitted to continue managing without the supervisory oversight of a bankruptcy trustee. In effect, the court allows it to act as its own trustee in bankruptcy.

A debtor that files for bankruptcy is, in effect, seeking protection from creditors by the legal system. The rights available to a bankrupt debtor, including a DIP, usually vary between different jurisdictions. It is usually recommended that parties affected by these situations seek specialist legal advice.

In some cases, the DIP may be able to continue to possess an asset by acquiring it from a creditor at its assessed fair market value. This is perhaps particularly true if the debtor can establish that the asset is necessary to maintain employment in order to pay outstanding creditors.

Bankruptcy law has evolved over many, many years. It exists to protect debtors as well as creditors. Initially, the law was all about protecting the rights of creditors. Over the years, the evolution has been such that debtor rights have generally increased. Bankruptcy law can be traced back several hundreds of years to the early Florentine merchants in fifteenth century Italy. In those days, when enterprises failed, creditors had the upper hand. The law was firmly behind them. Little opportunity was given to debtors to recover from their default situation. Indeed, they were often goaled with no right of appeal.

From that low base of debtor protection, bankruptcy law has during its many decades of evolution generally moved to build the rights of debtors. Legal systems nowadays reflect a more liberal community attitude toward bankrupt parties. Bankruptcy is viewed as an unavoidable outcome of modern commerce since risk taking is inherent to commerce. The law has developed to protect debtors and so prevent risk taking from being stifled in the economy overall.

Today, the law recognizes that risk is an inevitable companion to modern commercial affairs. It acknowledges that situations will inevitably develop where a person will not be able to honor outstanding debt obligations. Accordingly, the law has established various protections to allow debtors an opportunity to recover from a situation of bankruptcy.

One example of this principle is debtor in possession financing. This is highly specialist financing provided to entities that are under financial distress or have already formally declared themselves bankrupt with factoring receivables. Financings concluded in this context are given special treatment by the law. For example, the security pledged by a debtor to a creditor in a DIP financing is granted the most senior status in the event of default; it ranks more senior even than equity. Financing arrangements provided to an insolvent borrower may have some attractions to lenders because these arrangements are closely monitored by a bankruptcy court.

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