Debtor-in-possession financing

Definition

Debtor-in-possession financing refers to a special type of funding provided to a company that is undergoing bankruptcy proceedings but is allowed to continue operating its business. This financing is typically secured by the company’s assets and provides the necessary capital for the debtor to maintain operations during the restructuring process, allowing it to stabilize and eventually work towards reorganization or liquidation.

5 Must Know Facts For Your Next Test

1. Debtor-in-possession financing is crucial for companies in bankruptcy as it allows them to access funds needed for operational expenses, such as payroll and supplier payments.
2. This type of financing often comes with specific conditions, such as increased scrutiny from creditors and court approval, to ensure that it is in the best interest of all parties involved.
3. Lenders providing debtor-in-possession financing typically require a senior position in terms of repayment priority over existing creditors.
4. The terms of debtor-in-possession financing are negotiated before the court, often leading to a more favorable position for lenders due to the heightened risk associated with funding a distressed company.
5. Successful debtor-in-possession financing can significantly impact the company's ability to successfully emerge from bankruptcy and implement an effective reorganization plan.

Review Questions

• How does debtor-in-possession financing assist a company during bankruptcy proceedings?
  • Debtor-in-possession financing assists a company during bankruptcy by providing essential funds that allow it to continue operations while restructuring its debts. This financing helps cover critical expenses like payroll, rent, and supplier costs, enabling the business to maintain its value during the reorganization process. By stabilizing operations, the company increases its chances of successfully emerging from bankruptcy with a viable plan for future profitability.
• Discuss the implications of debtor-in-possession financing on existing creditors and how it alters their positions.
  • Debtor-in-possession financing can significantly alter the positions of existing creditors, as it often grants new lenders a senior status in repayment priority. This means that in case of liquidation or asset sales, these new lenders would be repaid before existing creditors. Additionally, existing creditors may find themselves at a disadvantage if the terms of this financing are deemed favorable to the new lenders, potentially leading to conflicts and negotiations regarding the company's reorganization plan.
• Evaluate the role of debtor-in-possession financing in determining the outcome of a company's bankruptcy process and its long-term viability.
  • The role of debtor-in-possession financing is pivotal in determining both the outcome of a company's bankruptcy process and its long-term viability. If structured effectively, this financing enables a distressed company to stabilize and maintain operations, which is essential for developing a successful reorganization plan. However, if not managed properly or if terms are unfavorable, it could lead to further financial strain or an inability to emerge from bankruptcy. Ultimately, the success of this type of financing can either facilitate a company's recovery or hasten its liquidation.

Related terms

Chapter 11 Bankruptcy: A provision in the U.S. Bankruptcy Code that allows a company to reorganize its debts while continuing its business operations.

Secured Debt: Debt backed by collateral, which gives lenders the right to take specific assets if the borrower defaults.

Reorganization Plan: A plan proposed by a debtor in bankruptcy to restructure its debts and continue operations, subject to court approval.