Debtor-in-Possession Financing

Who Provides It

The most common source is the company's existing secured lender. Bank examiners note that DIP credit is often provided by the same bank that financed the company before the filing, partly because bankruptcy rules can help protect its collateral and lien. Providing the loan can also keep a new lender from taking a lien ahead of the existing one.

Third-party lenders also compete for these loans, including non-bank lenders that specialize in distressed situations. In some cases, existing creditors provide new money in exchange for a role in the reorganized company.

What Lenders Evaluate

Priority alone does not make a loan safe. The OCC's guidance says a lender should consider whether the reorganization plan is likely to be approved, whether more borrowing will be needed, whether it is likely to be repaid when the plan is confirmed, and whether its collateral is protected if the case converts to a Chapter 7 liquidation. Lenders also look closely at:

• The quality and liquidity of the collateral

• The credibility of the cash budget and management team

• Vendor and customer support after the filing

• The likely exit path and its timing

How the Loan Gets Repaid

Most debtor-in-possession financing is repaid when the company exits Chapter 11. Common exit routes include new exit financing at plan confirmation, proceeds from a sale of the business or its assets, or conversion of the facility into a post-bankruptcy loan. The OCC notes that a successful reorganization typically results in full repayment, while a failed one can lead to a sale or liquidation in which full repayment is less likely.

Frequently Asked Questions

Can a company get DIP financing from its current lender?
Often, yes. Existing secured lenders frequently provide it to protect their position, and the court still has to approve the terms.

Is debtor in possession financing expensive?
It usually carries higher pricing and fees than ordinary commercial credit because of the risk, the legal work and the tight monitoring involved. Terms vary widely by case.

What if no lender will provide it?
The company may try to operate on cash collateral alone, sell assets quickly, or convert to Chapter 7. Each path has very different outcomes for creditors and owners.

Review Your Financing Options Early

If your business is under financial strain, it pays to understand the full range of options early, from collateral-based lines outside of bankruptcy to debtor-in-possession financing within it. Review your collateral, your cash runway and your obligations with qualified advisers, then compare the financing paths that fit your situation.

Debtor-in-possession financing is credit extended to a company after it files for Chapter 11 bankruptcy, so it can keep paying employees, suppliers and other operating costs while it reorganizes. Because the loan is approved by the bankruptcy court and gets special priority under the Bankruptcy Code, lenders are often willing to provide it to businesses that could not borrow on normal terms.

The term comes from the company's status in Chapter 11. Under 11 U.S.C. 1107, a debtor in possession keeps running its business and holds most of the rights and powers of a bankruptcy trustee, including the ability to seek new credit. This page explains how that credit is authorized, how it is usually structured, and what lenders and borrowers weigh before agreeing to it.

Please note: this page is general information, not legal advice. Chapter 11 financing depends on court approval and case-specific facts, so companies considering it should work with experienced bankruptcy counsel.

Why Companies in Chapter 11 Need New Money

Filing for Chapter 11 stops most collection actions, but it does not create cash. Vendors may demand cash on delivery, customers may slow orders, and professional fees start immediately. Without new liquidity, a business that might be worth more as a going concern can be forced into liquidation, which usually means lower recoveries for everyone.

New money lets the company keep operating, stabilize relationships with suppliers and customers, and buy time to negotiate a plan or run a sale process. It also reassures trade creditors that they will be paid for post-filing shipments.

How Section 364 Authorizes the Loan

Section 364 of the Bankruptcy Code sets out a ladder of protections. A debtor must generally show it could not get credit on a lower rung before the court approves a higher one:

1. Ordinary-course unsecured credit, treated as an administrative expense, which the business can usually incur without a special court order.

2. Unsecured credit outside the ordinary course, allowed as an administrative expense after notice and a hearing.

3. Superpriority and lien protection under section 364(c) when unsecured credit is not available: priority over other administrative expenses, a lien on unencumbered property, or a junior lien on property that is already pledged.

4. A priming lien under section 364(d), senior or equal to an existing lien, only if the debtor cannot get credit otherwise and the existing lienholder's interest is adequately protected. The debtor bears the burden of proving adequate protection.

Section 364(e) adds protection for lenders that act in good faith: if an approval order is later reversed or modified on appeal, the debt and its priority or lien generally remain valid unless the order was stayed pending appeal.

Court Approval and Timing

A company that needs cash right away usually files a financing motion with its first-day papers. Under Federal Rule of Bankruptcy Procedure 4001(c), the court may not hold a final hearing on a motion to obtain credit earlier than 14 days after the motion is served. Before then, it can approve interim borrowing only to the extent needed to avoid immediate and irreparable harm to the estate.

The rule also requires the motion to highlight certain terms, including any priority or lien under section 364(c) or (d), adequate protection or priority for pre-filing claims, waivers of Code provisions, and releases or limits on claims belonging to the estate. Creditors and the U.S. Trustee can object before the final order.

Separately, using a lender's cash collateral, such as collections on pledged receivables, requires that lender's consent or court authorization, so financing and cash collateral orders are often negotiated together.

Common Structures and Terms

• Revolving collateral line. The OCC notes that DIP credit is often structured as a revolver with a borrowing base of receivables and inventory, frequent reporting, field exams and cash dominion.

• New-money term loan. A lump sum or staged draws, often secured by all estate assets.

• Refinancing of pre-filing debt. A facility may replace or absorb some existing secured debt, sometimes called a roll-up, subject to court approval.

• Budget and variance tests. The company must follow an approved cash budget, often a rolling 13-week forecast, with limits on how far actual results can deviate.

• Milestones. Deadlines for filing a plan, holding a sale or confirming the plan.

• Carve-out. An amount set aside from the lender's collateral for professional fees and certain administrative costs.