US bankruptcy financing—debtor-in-possession (DIP) financing
Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP
US bankruptcy financing—debtor-in-possession (DIP) financing

The following Restructuring & Insolvency guidance note Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP provides comprehensive and up to date legal information covering:

  • US bankruptcy financing—debtor-in-possession (DIP) financing
  • DIP financing generally
  • The need for DIP financing
  • Applicable US Bankruptcy Code sections and Bankruptcy Rules—Local Bankruptcy Rules
  • Sources of DIP financing
  • DIP financing—getting to approval

DIP financing generally

Debtor-in-possession financing (DIP financing) is new, post-petition financing provided to a debtor in a bankruptcy case. The financing may be secured or unsecured, although generally the term DIP financing is used to refer to a sizable, secured loan that funds a debtor’s obligations during its chapter 11 case. Secured DIP Financing may rank above the payment rights of existing secured lenders.

Statutory authority for DIP Financing is found in the US Bankruptcy Code, s 364. The Federal Rules of Bankruptcy Procedure (Bankruptcy Rules) also contains rules concerning DIP financing (see Rules 4001 and 6003) and many venues have local rules promulgated by the relevant bankruptcy court concerning the provision of DIP financing.

The need for DIP financing

DIP financing may be used by any company seeking to restructure or liquidate its business through a bankruptcy filing that cannot meet its business needs from:

  1. cash on hand and/or

  2. cash from operations

A debtor may need financing to:

  1. fund its cash needs, including the costs of the bankruptcy proceedings

  2. stabilise its business, or

  3. provide comfort/confidence to trade vendors and customers to continue to do business

A debtor may use DIP financing as a bridge to:

  1. a sale of the business under Section 363 (see Practice Note: US Prepacks and US Bankruptcy Code, s 363 asset sales), or

  2. confirmation of a