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Taking out a Debtor in Possession loan during Chapter 11

On Behalf of | Nov 10, 2021 | Bankruptcy

A lot of businesses in Kentucky experience serious financial hardships that they can eventually recover from. Chapter 11 bankruptcy is designed for businesses that need to reorganize their debt rather than liquidate it. During the Chapter 11 bankruptcy process, a business may take out a Debtor in Possession, or DIP, loan.

Bankruptcy financing

A DIP loan is much different from a regular loan that a business would take out if it weren’t going through a bankruptcy. There is a lot more paperwork involved in a DIP loan, and a business must have already filed for commercial bankruptcy. One of the major differences between a DIP loan and a regular loan is that a DIP loan requires approval from a bankruptcy court judge and the trustee.

Why businesses take out DIP loans

Chapter 11 bankruptcy is a reorganization of debt, not an elimination of debt like in Chapter 7. Before entering into the reorganization process, a business may have taken some significant hits to their productivity due to their financial problems. A DIP loan is designed to help fund a business while the business owners work their way out of debt. These loans may be used for business activities such as:

  • Investing
  • Purchasing inventory
  • Manufacturing
  • Merchandising

Limitations of DIP loans

While a business is going through Chapter 11 bankruptcy and receiving funding from a DIP loan, its owners do not have control over major business decisions. Control over decisions concerning the sale of assets, business default and mortgages are in the hands of the bankruptcy court.

DIP loans are only issued to businesses that have filed for Chapter 11 bankruptcy and submitted a debt reorganization plan that was approved by the court. During this process, creditors and shareholders can potentially dispute decisions that are made by the bankruptcy court. Once the reorganization of debts is completed and the bankruptcy ends, business owners will regain control over their company’s operations.