A debtor in possession (DIP) is a person or legal entity that has filed for Chapter 11 bankruptcy protection under Federal Bankruptcy laws but still holds property to which creditors have a legal claim secured by a lien or other security interest. Under the reorganization plan, the bankruptcy court permits the DIP to continue business operations using that property but the DIP is unable to do anything other than normal business transactions with the property without court approval. The property can be real estate, equipment, or other assets for which a creditor has a secured claim.
DIP financing is a term used to denote special lending specifically for the credit needs of a DIP. The goal is to provide immediate cash to the DIP to facilitate their ability to continue business operations and fulfill the terms of their bankruptcy plan. Frequently, the plan’s approval by creditors is contingent upon the DIP securing such financing. The financing can take the form of a revolving line of credit, term loan, or special equipment financing.
The bankruptcy court must approve the DIP financing which can take different forms. The easiest form is unsecured credit with the lender receiving a priority administrative expense claim from the court. If the DIP can’t obtain unsecured credit, the court can authorize the DIP getting a secured loan or approve an extension of existing credit that has a priority administrative expense status. The last option is for the court to authorize a “priming” DIP loan which is a super-priority secured loan with priority over all pre-petition creditors. Priming loans first require adequate notice to and then the approval of all pre-petition creditors. It is the debtor’s responsibility to prove that any lender who is being primed will be in no worse shape because of the priming.
Given DIP financing requires creditor and court approval, the process can take a few months. Working through an attorney familiar with the DIP process and financing is highly recommended for anyone wanting to get through the process as quickly as possible. An experienced attorney can also help explain and give comfort to all creditors, enabling them to support a plan they are unlikely to be familiar with.
Propel Real Estate Capital is comfortable with and has provided DIP financing. Should you or your attorney want to explore how DIP financing might work for you, we encourage you to give us a call.