The United States Bankruptcy Code, or the Code, provides a variety of chapters wherein a distressed debtor can file. Debtors are afforded a filing pursuant to Chapters 7, 9, 11, 12, 13, and 15 and there is a proposed Chapter 17. There are also differences depending on whether the petition is being filed by an individual, a corporation, a municipality, or other entity.

Despite the multitude of bankruptcy options, a Chapter 11 corporate bankruptcy filing is the most well-known. When there are large corporations filing for bankruptcy protection under Chapter 11, those bankruptcies often make national news.

This article focuses on one aspect of a Chapter 11 corporate filing and that is DIP financing. DIP financing has specific rules and is often an integral part of a successful Chapter 11 process.

Debtor in Possession

In general, upon a bankruptcy filing, a Bankruptcy Court will assign a Trustee to manage the bankruptcy estate. The Trustee has certain powers provided by the Code and acts under the direction of a Bankruptcy Court.

In a Chapter 11 case, the powers of the Trustee are often vested in the Debtor in Possession, better known as the DIP. The DIP has certain powers otherwise vested in the Trustee.

DIP Financing

Part of the purpose of Chapter 11 bankruptcy is to provide a corporation the ability to emerge from bankruptcy as a stronger company. Chapter 11 allows a distressed company to reorganize by negotiating with the creditors.

For a company to continue to operate during the bankruptcy process, it will often need significant capital. One path to attain that capital is via DIP Financing. When a company is in distress, it often needs to find a source for liquidity. DIP financing is often the answer for a company operating in a bankruptcy to attain liquidity.

A lender that is interested in forwarding a DIP loan will want to make sure that it gets paid back. There are competing interests: On the one hand, there are creditors who want to get repaid from loans prior to bankruptcy; on the other hand, the only way to keep the business afloat is for the business to have liquidity, which will require a guarantee that the lender will be repaid.

To that end, a DIP will submit a request to a Bankruptcy Court asking for financing where the lender will have first priority. The reasoning is that the business needs liquidity or else a workout would not be possible. A Bankruptcy Court would need to approve the financing. Often, creditors will oppose the financing because the DIP lender, not them, gets first priority of repayment.

When submitting a request for DIP financing, the terms of such financing will be scrutinized. These terms are often negotiated. Once approved, the loan will be valid and although outside of bankruptcy it may be subject to a challenge, it is not subject to a challenge over the course of the bankruptcy.

In debt? Bankruptcy may be right for you. Contact the law firm of Melanie Tavare, an Oakland Chapter 11 Bankruptcy attorney.