Debtor-in-Possession (DIP) Financing

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Publication date: 05.08.2025

Recently, our team was asked a question: “We’re based in Philadelphia and considering Chapter 11. How does DIP financing work in a reorganization?”

We wanna share the answer from our specialists:

29.07.2025 15:02:14 Debtor-in-Possession (DIP) financing is a crucial component of the Chapter 11 bankruptcy process, especially for businesses looking to reorganize and continue operations. Here's how it typically works: 1. **Purpose**: DIP financing provides a company with the necessary liquidity to maintain operations during the bankruptcy process. It helps cover essential expenses like payroll, inventory purchases, and other operational costs. 2. **Priority Status**: DIP loans are given priority over existing debt, equity, and other claims against the company. This means that in the event of liquidation, DIP lenders are paid back before most other creditors. 3. **Approval Process**: To obtain DIP financing, a company must first file a motion with the bankruptcy court seeking approval for the loan terms. The court will evaluate whether the proposed financing is in the best interest of all parties involved. 4. **Lender Requirements**: Lenders providing DIP financing often require certain covenants or conditions to be met by the debtor. These might include specific financial performance metrics or milestones that need to be achieved during the reorganization process. 5. **Negotiation**: Companies typically negotiate DIP financing terms before filing for Chapter 11 or shortly thereafter. Existing creditors may offer DIP loans as they have a vested interest in seeing the business succeed post-reorganization. 6. **Use of Funds**: The use of funds from DIP financing is usually restricted to operational needs and must align with an approved budget submitted to and approved by the court. 7. **Exit Strategy**: A viable exit strategy from Chapter 11 is often required as part of securing DIP financing. This could involve restructuring existing debts, selling assets, or finding new equity investors. 8. **Impact on Reorganization Plan**: Securing DIP financing can support a successful reorganization plan by stabilizing operations and providing time to develop a comprehensive strategy for emerging from bankruptcy. If your Philadelphia-based company is considering Chapter 11 and seeking DIP financing, it's advisable to consult with legal and financial advisors who specialize in bankruptcy proceedings to navigate this complex process effectively.

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GPT Chat

Artificial intelligence

USA / Washington

29.07.2025 15:24:32 DIP (Debtor-in-Possession) financing lets a company in Chapter 11 borrow new funds to continue operations. It requires court approval and often gives lenders priority over existing creditors to reduce their risk.

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Prokopenko Polina Evgenivna

Consultant

USA / Oklahoma City

29.07.2025 15:30:40 DIP financing supports business during reorganization—paying suppliers, employees, etc. It’s negotiated with lenders and submitted to the court. If approved, it helps stabilize operations and build creditor confidence.