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REJECTED How does debtor-in possession financing work?

On Behalf of | May 9, 2023 | Bankruptcy

Debtor-in-possession financing can be a lifeline to struggling companies in Kentucky who are trying to remain solvent. Also known as DIP, this method can help your company avoid an impossible financial situation when it loses its means of traditional financing or finds it impossible to get new loans.

How does DIP financing work?

DIP financing can occur when a business files for Chapter 11 bankruptcy. This bankruptcy type focuses on reorganization over liquidation, with bankruptcy law outlining financing guidelines that benefit the borrower and the lender. It can only occur when a lender believes the company has a reasonable chance of recovery and a sound plan to turn around the business. Bankrupt companies can use the money to keep the business afloat throughout bankruptcy. If you receive DIP funds, you can use them for the following:

  • Salaries
  • Vendor expenses
  • Utility payments
  • Taxes
  • Fees involving restructuring

How the DIP process works

Bankruptcy laws incentivize lenders to issue these types of loans, noting that DIP creditors must receive payment before any other creditors if a loan defaults. The DIP creditor also has first priority on assets if the company liquidates. After finding a willing lender and negotiating terms, the bankruptcy court will decide on approving the loan. Businesses must pledge collateral to cover the loan.

How Chapter 11 bankruptcy can benefit your business

Chapter 11 bankruptcy is similar to Chapter 13 but has features that make it favorable to business, including the ability to pay priority tax debt over five years. It also has unique bankruptcy features, including the ability to manage your assets instead of having a trustee oversee them. Chapter 11 also allows debtors to file a reorganization plan within an extended time of 120 days.

The flexibility allowed by Chapter 11 works well for high-income individuals with significant assets or substantial debt. Every Chapter 11 plan should be customized for your company’s unique situation. Sometimes situations leading to bankruptcies are out of one’s control. Chapter 11 filings take this into consideration and allow you more control over your financial situation.