One of the most powerful features of a Chapter 11 bankruptcy is the ability of the “debtor in possession” to use the bankruptcy rules to access financing. Very often, distressed businesses need to find a way to inject capital into their business as part of a comprehensive reorganization plan.
Debtors are often faced with a situation where lenders are unwilling to extend credit, due to fears concerning the ability to repay. The Bankruptcy Code offers a way to make both lender and debtor satisfied. “Debtor in possession” financing (DIP financing) is one method that has worked for many troubled businesses and individuals. Essentially, the debtor will request permission of the Bankruptcy Court for approval of the DIP financing. The loan would normally be characterized as a priority security interest. Existing creditors or lienholders will want adequate assurances that their interests will be protected.
The bottom line is that the DIP financing procedures can enable a debtor to obtain the kind of financing that it would not normally be able to obtain outside of bankruptcy. Because the DIP loan is not subject to a legal challenge, a lender is going to have a higher level of comfort participating in the transaction. Frequently in Chapter 11 cases there are situations where assets are being sold. The Chapter 11 protections mean frequently that assets can be bought or sold under more favorable conditions than if there were no bankruptcy, and the ability to get DIP financing can also help expedite the process.
The end result is a greater flexibility given to the debtor, and a greater ability for the debtor to plan a Chapter 11 plan of reorganization that meets the specific needs of the case.