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Overview of debtor-in-possession financing in Chapter 11

On Behalf of | Aug 10, 2021 | Bankruptcy, Debt

A consumer in Lexington, Kentucky, can choose from several types of bankruptcy when he or she feels he or she can no longer manage his or her debt. Bankruptcy allows consumers to discharge certain types of secured debt. A common option for businesses owners and individuals is Chapter 11 bankruptcy, which offers them debtor-in-possession financing.

Chapter 11 bankruptcy overview

Chapter 11 bankruptcy allows a business or individual to file when he or she exceeds the debt limits of Chapter 13. The consumer submits a plan to the court for approval to pay creditors over time without selling assets. Unlike other types of bankruptcy, Chapter 11 doesn’t have a debt limit, but debt still must meet filing requirements.

Since Chapter 11 is often complex and time-consuming, Congress made it easier for small businesses under the Small Business Reorganization Act of 2019. This provision is called Subchapter V, which helps small businesses pay debt with a faster and more simplified process.

Debtor-in possession financing

Chapter 11 bankruptcy offers a unique benefit for business owners called debtor-in-possession financing. While the business repays debt, debtor-in-possession financing grants it accesses to capital for operation, commonly called a priming loan. The owner can only use this money for business operations, such as payroll and vendors. Some lenders may offer revolving credit, which works like a credit card, letting the debtor withdraw as needed.

However, these loans aren’t available to everyone, and the business owner must get court approval after he or she finds a lender. The court may offer the lender protective measures to encourage loan approval. An example of a protective measure is a lien or promising the lender priority if the owner must liquidate anytime during the bankruptcy.

Bankruptcy provides debtors temporary protection from creditors with the automatic stay. Bankruptcy doesn’t have to be a negative thing, but consumers should study their options.