A debtor in possession (DIP) refers to person or company that has formally declared bankruptcy but nevertheless allowed by the bankruptcy court to remain in possession of assets in which creditors have a valid claim or legal right. Naturally, in allowing this leeway, the courts also impose strict responsibilities on the DIP. Nonetheless, it allows the debtor an opportunity to best resolve the situation, both for themselves and creditors. In practice, DIP status is mostly granted to corporations rather than natural persons.
A company that continues to run its affairs under Chapter 11 is a DIP. In this situation, the company submits a plan for reorganization with invoice factoring. It is permitted to manage in this way without oversight by a bankruptcy trustee Its reorganization plan usually includes proposed refinancings.
The rights of a DIP who has been granted bankruptcy protection, and the rights of entities dealing with such debtors, may vary from jurisdiction to jurisdiction. Specialist legal advice is usually required to establish the prevailing legal framework.
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.
Legal systems in most western countries these days recognize that risk taking is an inherent part of business. Things do sometimes go wrong. Bankruptcy law acknowledges that reality. It has evolved a framework that protects creditors and also allows debtors to claim a right to recover from adverse circumstances if they can establish that the recovery effort will be of benefit to creditors.
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 accounts receivable factoring.
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Tags: accounts receivable factoring, Credit Debt Consolidation, factoring receivables, invoice factoring