DIP Financing: How Companies Fund a Chapter 11 Case

When a company files for Chapter 11 bankruptcy, one question immediately becomes critical: how will the business keep operating while the restructuring process unfolds? Employees must be paid, vendors must deliver goods, and professionals such as lawyers and financial advisors must be compensated. Without access to cash, the restructuring effort can collapse almost immediately.

In many Chapter 11 cases, the answer comes from debtor‑in‑possession (DIP) financing, which is a specialized form of lending that allows a bankrupt company to borrow money after filing for bankruptcy protection.

Understanding DIP financing is essential for anyone involved in distressed investing, restructuring, or bankruptcy law.

The Two Sources of Cash in Chapter 11

Companies entering Chapter 11 generally have only two possible sources of funding: existing cash/operating revenue or new financing. The goal here, as outlined by Zachary McKay of Jackson Walker, is to give the business enough liquidity to get the debtor through the case.

• Existing cash or operating revenue is often subject to lenders’ liens and, therefore, classified as cash collateral.
• New financing is usually provided through a DIP loan.

The Bankruptcy Code recognizes both of these funding paths. Under 11 U.S.C. §363, a debtor may seek court approval to use cash collateral. Under 11 U.S.C. §364, the debtor may obtain new credit during bankruptcy, including secured DIP loans.

Both mechanisms serve the same purpose: keeping the business alive long enough to reorganize or sell its assets.

“Without cash collateral or debtor‑in‑possession financing, a business actually can just stop in its tracks. It can’t pay its employees, it can’t pay vendors,” notes Harold Israel of Levenfeld Pearlstein, LLC.

Cash Collateral

The simplest form of funding in Chapter 11 is cash collateral.

Cash collateral generally refers to money that belongs to the bankruptcy estate but is subject to a lender’s security interest. This may include cash on hand, accounts receivable, proceeds of inventory sales, or other operating revenue.

Because this cash technically belongs to the secured lender, the debtor cannot use it freely and so needs the court’s permission. This is why companies often file cash collateral motions on the first day of a bankruptcy case.

Adequate Protection: Protecting Secured Lenders

When a debtor seeks to use a lender’s cash collateral, the Bankruptcy Code requires the debtor to provide adequate protection to the secured creditor.

According to Evan Hill of Cravath, Swaine & Moore LLP,  adequate protection ensures that the lender’s collateral position does not deteriorate during the bankruptcy process.

Adequate protection may take several forms:

• Replacement liens are the most common. These liens grant the lender a security interest in post‑petition assets that replace pre‑petition collateral.
• Periodic cash payments may also be used to compensate a lender if collateral depreciates during the case.
• In addition, lenders frequently require strict financial reporting and budget compliance so they can monitor how the debtor is using cash collateral.

These protections help strike a balance between allowing the company to operate and preserving the lender’s rights.

DIP Financing

When existing cash is insufficient, companies turn to DIP financing.

A DIP loan is new financing extended to a company after the bankruptcy filing, typically with court approval.

From the company’s perspective, the goal is simple: survival. However, DIP financing often comes with strict terms and high costs, including elevated interest rates, commitment and exit fees, and tight operating budgets. These terms reflect the significant risk lenders take when financing a bankrupt company.

Key Issues DIP Lenders Care About

From the lender’s perspective, DIP financing is about risk control and repayment certainty.

Lenders typically focus on milestones that establish deadlines for key events in the case. These may include approval of bidding procedures, asset auctions, plan confirmation, and sale closings. Milestones ensure the case moves forward quickly and that the lender’s capital is not tied up longer than necessary.

Another important feature is the superpriority administrative claim. DIP lenders often receive priority over most other creditors in repayment. ‘Carve‑outs’ are also common. These provisions ensure that funds remain available to pay bankruptcy professionals and administrative expenses, even if a lender exercises its rights against collateral.

The Role of the Creditors’ Committee

Once appointed, the official committee of unsecured creditors often becomes heavily involved in DIP negotiations.

The committee’s interests differ significantly from those of secured lenders. Because of this, committees frequently challenge aggressive DIP provisions such as short investigation periods, restrictive milestones, or lender releases. The committee may also investigate whether the pre‑petition lender properly perfected its liens. If there are flaws in the lender’s collateral filings, that discovery can create significant leverage for unsecured creditors.

The Evolution of DIP Financing

Over time, DIP financing has evolved significantly. One of the most notable trends is the speed at which bankruptcy cases now move, typically within 90 days. Some modern cases move even faster, with asset sales completed in as little as 45 days.

Another development is the increased use of ‘roll‑ups,’ where pre‑petition debt is converted into post‑petition DIP obligations. These structures can give lenders greater protection and priority in the bankruptcy case.

DIP financing can also be used strategically by distressed investors.

In some cases, an investor purchases a company’s secured debt at a discount and then provides DIP financing to control the restructuring process. Credit bidding allows a secured lender to bid the amount of its debt instead of paying cash in a bankruptcy auction. If the lender wins the auction, it may obtain the company’s assets through the sale process. If another bidder offers more, the lender still benefits because the higher auction price increases the value of its claim.

Why DIP Financing Matters

As Maria Carr of McDonald Hopkins LLC points out, DIP financing is, at its core, the driver for how things happen in a bankruptcy case. It provides the liquidity necessary for a distressed company to continue operating, preserve jobs, negotiate with creditors, and pursue a restructuring or sale. Without that financing, many Chapter 11 cases would end before they even begin.

In bankruptcy, cash truly is survival, and DIP financing is often the key to keeping a company alive long enough to complete a successful restructuring.

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To learn more about this topic, view The Nuts & Bolts of DIP Financing. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Cash Collateral & DIP Financing.

This article was originally published on March 23, 2026.

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