Bankruptcy financing is lending money to an enterprise going through a chapter 11 bankruptcy reorganization. Debtor in possession (DIP) financing is another term for bankruptcy financing. The company uses the money to fund its operations as it is going through bankruptcy procedures to emerge healthy after everything is over. The funds are larger than the anticipated needs in size. A company can seek bankruptcy funding from preferred Private Bankruptcy Lenders. The following is what you need to know about bankruptcy financing.
DIP financing vs. regular financing
There is a need to understand the difference between DIP financing and regular financing. The debtor in possession financing helps companies facing financial problems and looking for bankruptcy relief. Its main aim is to fund a company out of bankruptcy. However, regular financing involves funding a company to engage in profitable business activities like investing, manufacturing, making purchases, and merchandising.
DIP financing process
The debtor in possession financing is a lengthy process. Before receiving the finances, a company must acquire approval from the judge, U.S. trustees, and the court. Additionally, various legal activities must be adhered to under chapter 11. The DIP financing process involves;
- Filing process: an organization must first file for a chapter 11 petition in a bankruptcy court before receiving the DIP financing.
- The debtor continues the business’s operations: this means that the actual debtor is given majority possession, as the name implies.
- Major decisions such as a mortgage, financing agreements, lease agreements, and attorney expenses are handed over to the bankruptcy court.
- Constructing a plan: there is the completion of the reorganization plan before financing the company. There must be a streamlined plan showing how the company will use the finances to pull itself out of bankruptcy.
Reform plan and confirmation of chapter 11
After an organization files for chapter 11 and an agreement is reached, the debtor needs four months to propose a reform plan. In case the debtor misses the four-month deadline, the period is extended after the debtor gives a satisfactory reason. The reform plan is essential as it helps the creditors understand how the company intends to operate after bankruptcy and how it will pay its commitments in the future.