Debtor-In-Possession (DIP) Financing Key Terms

Understand important terms related to Debtor-In-Possession (DIP) Financing

Debtor in Possession (DIP) is a term for a fictional entity when a company is undergoing bankruptcy. It refers to the fact that the debtor is still managing the company, but cannot make any major financial decisions or sell off large assets without the approval of the bankruptcy court. The debtor makes only day-to-day decisions that keep the company running until the final decisions are made. During this process, the debtor may secure financing to meet company expenses--this is Debtor-in-Possession financing.

 

Out-of-court restructurings

Out-of court restructurings are sometimes called workouts. Debtors attempt to negotiate terms with banks, tax authorities, vendors, and others who have extended them credit. It is usually less expensive and better than declaring bankruptcy. Most of the time, these restructurings will reduce a company's debt and extend its terms of repayment.
Try: The Turnaround Management Association offers articles, webinars and other resources that explain the benefits of out-of-court restructurings and give examples of successful ones.

In-court restructurings

For in-court restructurings, debtors go to court and declare bankruptcy. The structure for paying back debts--often a small amount of the total owed--is worked out during the court process.
Try: Distressed Debt Analysis: Strategies for Speculative Investors by Stephen G. Moyer explains in-court restructurings.

Plan of reorganization

A Plan of Reorganization, or POR, explains how the debtor plans to get out of bankruptcy. In some cases, the creditors vote on the plan. In others, especially during larger proceedings, committees may influence the final court decision.
Try: Pathfinder Metrics explains the purpose of a POR.

Post-petition financing/Debtor-in-Possession agreement

Post-petition Financing/Debtor in Possession Agreement are the arrangements that are made between a debtor and a creditor to finance the business after the bankruptcy case begins. The bankruptcy court must approve this agreement.
Try: South Bay Law Firm Law Blog discusses Post-petition Financing.

Turnaround financing

Turnaround financing infuses capital into a failing business. Prior to offering funds, investors look at key areas of the company to see if changes would result in a stronger, more profitable business.
Try: BusinessFinance.com shows how an investor evaluates whether or not to provide turnaround financing.

Creditors meeting

A creditors meeting is often called a "341 meeting," because that is the section of the bankruptcy code that sets the requirements for such a meeting. The meeting is a fact-finding session to determine the debtor's assets and liabilities. Creditors may come to ask questions, but most do not attend unless they believe the debtor has done something fraudulent.
Try: Biz Help 24 and Moran Law Group explain what creditors meetings are and why they are held.

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