What Is DIP Financing in Chapter 11 and Why It Matters
New money keeps a bankrupt company running, and the lender's terms often decide how the case ends. Section 364 of the Bankruptcy Code sets what those lenders can get.
Debtor-in-possession (DIP) financing is a loan to a company in Chapter 11 that the bankruptcy court approves under section 364 of the Bankruptcy Code. Because the company is already in bankruptcy, the DIP lender usually gets priority over other claims and liens on the company’s assets, sometimes ahead of existing lenders. The DIP order and credit agreement on the court docket set the terms and deadlines.
The company keeps running its business as a “debtor in possession,” and the DIP loan pays for payroll, inventory, rent and professional fees while it reorganizes or sells itself. The US Courts’ Chapter 11 basics page explains the wider process.
Why does a company in Chapter 11 need new money?
Filing stops collection and most debt payments, but the business still needs cash to operate. Suppliers often demand cash on delivery, and customers want proof the company will survive. Often the company can use its existing cash only with court permission, and that cash is usually collateral for existing lenders.
New lenders will not take that risk on normal terms, so the Bankruptcy Code lets the court give them protections no lender could get outside bankruptcy.
What priority does a DIP lender get?
11 U.S.C. 364 sets a ladder. The court moves up a rung only if the company shows it cannot borrow on the terms below it.
| Section | What the lender gets |
|---|---|
| 364(a) | Ordinary-course unsecured credit, treated as an administrative expense, without a court order |
| 364(b) | Other unsecured credit as an administrative expense, with court approval |
| 364(c)(1) | “Superpriority”: a claim ahead of all other administrative expenses |
| 364(c)(2) | A lien on property that is not already pledged |
| 364(c)(3) | A junior lien on property that is already pledged |
| 364(d) | A “priming” lien senior or equal to existing liens, only if no other credit is available and existing lienholders are adequately protected |
The company carries the burden of proving adequate protection, which can mean replacement liens, cash payments or an equity cushion. Under 364(e), a lender that lends in good faith keeps its priority and liens even if the order is later reversed on appeal, unless the order was stayed.
What are interim and final DIP orders?
Most companies ask for DIP approval on the first day of the case. Under Bankruptcy Rule 4001(c), the final hearing cannot start until 14 days after the motion is served, but the court can hold an earlier preliminary hearing and approve only the borrowing needed to avoid immediate and irreparable harm until then. That is the interim order.
The motion must summarize the key terms and flag provisions that courts scrutinize, including:
- liens and priority under 364(c) or (d);
- protection or payment of prepetition claims, including roll-ups;
- findings that the lender’s prepetition liens are valid;
- deadlines for filing a plan, approving a disclosure statement or confirming a plan;
- waivers of the estate’s rights under section 506(c) to charge collateral for preserving it;
- liens on proceeds of avoidance actions, such as preference claims.
Between the two hearings, the official committee of unsecured creditors usually forms and negotiates or objects, and the final order often comes out with changed terms.
What is a DIP roll-up?
A roll-up converts some of a lender’s prepetition debt into postpetition DIP debt, so it gains the DIP’s priority. Lenders that are already owed money often require it as the price of new money.
Red Lobster is a recent example. The restaurant chain filed for Chapter 11 on May 19, 2024, in the Middle District of Florida, with a $100 million new-money DIP commitment from its existing term lenders, for whom Fortress Credit Corp. was agent. The DIP facility as reported also rolled up about $175 million of those lenders’ prepetition loans. An entity formed by the lenders agreed to be the stalking horse bidder for the business, offering to pay largely by crediting the DIP debt, and a Fortress-led group later acquired the chain under a court-approved plan.
How do DIP milestones push a sale?
DIP agreements set deadlines, or milestones: for example, bid procedures approved within a set number of days, an auction by a date and a sale closing soon after. Missing one is a default that can let the lender stop funding or foreclose. When the DIP lender is also the stalking horse, the milestones and the lender’s right to credit bid under section 363(k) shape who ends up owning the business. Our guide to section 363 sales covers the auction step.
What does DIP financing mean for employees, customers and vendors?
- Employees: DIP money is what funds payroll after filing. Courts usually approve first-day motions to pay prepetition wages up to the statutory priority limits; see what employees are owed in bankruptcy.
- Customers: a funded DIP is the main sign that stores, service and warranties will continue at least through the case. The DIP budget, filed with the motion, shows weekly spending.
- Vendors: goods shipped after filing are administrative expenses, paid ahead of prepetition unsecured claims, but a superpriority DIP claim ranks ahead of them. Unpaid prepetition invoices are general unsecured claims in most cases.
- Shareholders: superpriority debt and roll-ups add to the claims ahead of equity, which is one reason common stock often gets little or nothing; see common stock in Chapter 11.
Bottom line
The DIP motion and its attached budget are often the most informative documents in a new Chapter 11 case: they show how many weeks of cash the company has, which lenders control the process and the dates by which a sale or plan must happen. They are free to read on the claims agent’s case website listed in the first-day filings.
FAQ
Who usually provides DIP financing?
Most often the company’s existing secured lenders, because they want to protect their collateral and avoid being primed by an outsider. Third-party lenders sometimes compete with better terms.
Can creditors object to a DIP loan?
Yes. The creditors’ committee and other parties can object before the final hearing, and objections often lead to lower fees, smaller roll-ups or later milestones.
What is a carve-out in a DIP order?
It is an amount set aside ahead of the DIP lender’s liens, usually to pay professional fees and court costs, so the case can be run even if the loan defaults.
Is DIP financing a good or bad sign?
It means the company has money to operate in Chapter 11, but the terms show who controls the outcome. Tight milestones and a lender acting as stalking horse usually point to a quick sale rather than a standalone reorganization.
