DIP financing (Debtor in Possession Financing)
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How Debtor In Possession (DIP) Financing Works:
DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. DIP financing is considered attractive because it is done only under order of the Bankruptcy Court, which is empowered by the Bankruptcy Code. Debtor-in-Possession financing can also provide corporate bankruptcy financing to engage in a prepackaged business bankruptcy where the asset based lender providing DIP financing supplies the funds to work out a settlement with creditors up front, in order to walk into corporate bankruptcy court with this pre-packed settlement.
Under Chapter 11 bankruptcy, a business files for protection from creditors while it reorganizes itself. Instead of granting the creditors' claims from liens and security interests in the business assets and allowing them to take possession, the bankruptcy court allows the business to retain ownership and control of specific assets. During that time, the business must prepare a reorganization plan that proposes a method, an amount, and a time frame by which it will pay its creditors.
If granted debtor-in-possession status by petition to the bankruptcy court, the business may use assets of the business, including vehicles, equipment, and plant to continue operations. In practice, the continued operations allow the debtor in possession to reorganize, reposition itself, and improve its chances of re-paying creditors, even while all of its finances fall under the strict supervision of the bankruptcy court.
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