When businesses (and sometimes individuals) file for Chapter 11 bankruptcy relief, the court could leave them as debtors in possession (DIP) of their companies. But what that actually means is often unclear to these debtors.
Let’s delve deeper to learn more.
Does a debtor in possession own their business?
No. At that point, DIP status means that the court controls the assets that must one day be liquidated to pay the creditors. But it allows the business to continue operating under the supervision of the court.
The business owner likely will remain involved in the day-to-day operations, but major decisions must be approved by the court. Also, the company must continue to make all workers’ payments, plus withhold and deposit taxes and cover their FICA or Medicare and Social Security.
Is DIB a positive thing?
No bankruptcy consequences are necessarily positive, but this is not the worst outcome, at least initially. Allowing the business to continue operating as before makes it ultimately more desirable to buyers and investors alike.
It also buys the debtor time to attract investors who could cover the debt and restructure the flagging company’s business model. In some cases, a business owner might be able to buy the company back. However, this is not the typical outcome, and asset sales to pay creditors are far more common.
What are the negatives?
Obviously, the lack of autonomy over the company will chafe at most business owners used to running the show. Using this time to better manage the business can help you move on from your Chapter 11 bankruptcy.