What is a Debtor-in-Possession (DIP)?
In general, a Debtor-in-Possession the title given to the debtor or management of the debtor when it is acting in the capacity of the trustee (see below) of its own assets in a Chapter 11 bankruptcy. There cannot be a debtor-in-possession in a Chapter 7 or 13.
The Bankruptcy Trustee
In all bankruptcies, whether Chapter 7, Chapter 11 or Chapter 13, there is a a trust and a trustee. As with all trusts, there are three components, the trustee (here, the trustee in bankruptcy), the trust res (here, all assets of the debtor in bankruptcy) and beneficiary(ies) (here, the creditors of the debtor). The bankruptcy trustee is charged with taking possession of assets, collecting and/or liquidating the assets, determining the creditors holding valid claims, and then making distributions to the beneficiary creditors pursuant to the statutory bankruptcy scheme. In a Chapter 7 bankruptcy, a trustee is appointed by the US Trustee (see below), often off a “panel” of trustees with the experience and know-how to act within the bankruptcy framework.
When is a Bankruptcy Trustee a Debtor-in-Possession?
Given that Business Chapter 11 Bankruptcies are typically filed by operating businesses which may be quite complex (see, for example, American Airlines, Atari, etc.), Congress has decided that it is in the best interests of creditors to allow Debtor’s management to act as the Bankruptcy Trustee until such time as the Bankruptcy Court determines that it not in the best interests of beneficiary creditors to do so, rather than have a panel trustee not familiar with the operational complexities of the business operate the business. When the management of the debtor (or the debtor himself, if an individual) is acting as the trustee in bankruptcy, it is referred to as a “Debtor in Possession” or “DIP.” (This is why operational loans to companies operating in Chapter 11 bankruptcy are referred to as “DIP loans” or “DIP financing.”)
Comparison of Bankruptcy Trustee and US Trustee
There are two types of trustees in all bankruptcies, which are commonly confused. There is the “trustee” of the bankruptcy estate, who is charged with collecting/liquidating assets, determing valid claims, and making distributions to creditors. In contrast, there is the “United States Trustee” (also known as the UST, or US Trustee”), who is sometimes referred to as the “bankruptcy police” who is tasked with preserving the integrity of the bankruptcy system and to prevent abuses.
The United States Trustee Program is a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees under 28 U.S.C. §586 and 11 U.S.C. §101, et seq. It consists of 21 regional U.S. Trustee Offices nationwide and an Executive Office for U.S. Trustees (EOUST) in Washington, DC.