Lately I have been asked a lot about one of the types of financing I offer. Everyone knows about bridge financing, hard money, conventional loans, Lines of Credit, etc. Not many people have heard of Debtor in Possession financing never mind what it is and how to use it.
Debtor in Possession financing or DIP financing is a special form of financing that can be used by companies in financial distress usually in Chapter 11 bankruptcy. DIP financing is unique because the bankruptcy court usually grants a priority status to the new loan. This means that all existing financing on a property owned by a company in Chapter 11 become junior to the new DIP financing.
DIP financing is a great tool for a company in chapter 11 as it allows the company to retain ownership of the property it is operating out of which translates into less disruption of normal business activities.
The process is controlled by the bankruptcy court and is offered as an option once it has being determined that the Plan of Reorganization (POR) can be successfully completed. The POR must specify how the debtor intends to re-pay the creditors and DIP financing.
The value of the new loan will be determined by the current market value of the property not what the debtor paid for it. This is a very important consideration in today’s volatile real estate market.
Debtor in Possession financing is a powerful tool available to companies that require new financing in order to restructure successfully but due to the complex nature of Chapter 11, DIP financing requires a lender with specialized knowledge and experience.
Bankruptcy and DIP financing are complex legal matters so make sure to get appropriate legal advice when considering these options.
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