DIP financing, short for debtor-in-possession financing, is new credit extended to a company after it files for Chapter 11 bankruptcy so it can keep operating while it restructures. What makes it workable is a special status under federal bankruptcy law: the court can move the new lender ahead of nearly every existing creditor in the repayment line, offsetting the obvious risk of lending to a company already in distress.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit Without access to fresh capital, most Chapter 11 cases would collapse into liquidation almost immediately.
Why a Chapter 11 Company Needs New Money
The moment a company files, its existing credit relationships freeze. Suppliers move to cash on delivery. Banks stop honoring revolving lines. Vendors owed money before the filing demand upfront payment for future orders. Meanwhile, payroll, rent, inventory, and utilities keep arriving on schedule.
The company itself stays in charge of its assets and operations as a “debtor in possession,” essentially acting as its own trustee.2United States Courts. Chapter 11 Bankruptcy Basics That continuity is the whole point of Chapter 11. A running business is worth more than one being picked apart, and pre-filing creditors tend to recover more if the company keeps operating and either reorganizes or sells as a going concern. A DIP loan is what pays the bills between the filing date and that resolution.
How Section 364 Sets Up the Priority Ladder
Super-priority is not automatic. Section 364 of the Bankruptcy Code builds a ladder of escalating incentives, and the debtor has to show it could not obtain financing at a lower rung before climbing to the next.
- Section 364(a) lets the debtor take on unsecured debt in the ordinary course of business without special approval. That debt is treated as an administrative expense of the estate and typically covers routine trade credit from vendors willing to keep shipping.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
- Section 364(b) covers unsecured credit beyond the ordinary course. It still receives administrative expense treatment but requires a hearing and notice to creditors.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
- Section 364(c) applies when no lender will extend unsecured credit even with administrative expense status. The court can grant a super-priority claim that outranks other administrative expenses, a lien on unencumbered property, or a junior lien on already-encumbered property.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
- Section 364(d) is the most aggressive tool: a priming lien that jumps ahead of existing secured creditors on the same collateral. The court will grant one only if no lesser incentive will attract the financing and the existing secured creditor receives adequate protection.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit
The debtor carries the burden of proof on adequate protection whenever a priming lien is on the table. A court will not sign off on a priming lien if someone was willing to lend on a junior lien or a lien on unencumbered assets.
Where a DIP loan lands in the payout hierarchy depends on which rung it sits on. Under Section 507, administrative expenses are paid second in the estate’s priority scheme, after domestic support obligations, and ahead of wage claims, customer deposits, taxes, and general unsecured creditors.3Office of the Law Revision Counsel. 11 USC 507 – Priorities A super-priority claim under Section 364(c)(1) jumps ahead of even those administrative expenses. Add a lien on specific assets, and the DIP lender has both a super-priority unsecured claim and a secured interest. If reorganization fails and the company liquidates, the DIP lender is paid from those assets before nearly everyone else.
Priming Liens and Adequate Protection
A priming lien lets the new lender’s collateral interest leap ahead of an existing secured creditor’s lien on the same property. If a bank held a first-priority lien on the company’s equipment before filing, a priming lien can push the DIP lender in front of that bank on that same equipment.
Two conditions have to be met. The debtor must show it cannot obtain financing any other way, and the existing secured creditor must receive adequate protection.1Office of the Law Revision Counsel. 11 USC 364 – Obtaining Credit Section 361 defines what that protection can look like: cash payments to compensate for any decline in the collateral’s value, replacement liens on other property, or any other relief that gives the creditor the “indubitable equivalent” of its interest.4Office of the Law Revision Counsel. 11 USC 361 – Adequate Protection
One form of protection is off the table. Section 361 specifically prohibits offering the existing creditor an administrative expense claim as adequate protection.4Office of the Law Revision Counsel. 11 USC 361 – Adequate Protection Protection has to come through replacement value, not a priority claim against the estate. This is where contested DIP fights usually break out: the existing secured creditor argues the proposed protection is not truly adequate, and the debtor and new lender argue the collateral or the replacement liens fill the gap.
How the Court Approves the Loan
A DIP loan needs a judge’s blessing. The debtor files a motion, often on the first day of the case, asking for authority to borrow. Under Bankruptcy Rule 4001, the motion has to include a copy of the credit agreement, a proposed order, and a concise summary of all material terms, including interest rates, default provisions, liens, and borrowing limits.5Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 4001
The rule also singles out aggressive provisions that must be flagged upfront rather than buried in the loan agreement: priming liens, waivers of the automatic stay, deadlines for filing a reorganization plan, releases of estate claims, and securing pre-petition debt with post-petition collateral.5Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 4001
Interim and Final Hearings
A bankrupt company usually cannot wait weeks for full approval, so the process splits in two. At a preliminary hearing within the first few days, the judge can approve an interim draw large enough to cover immediate needs like payroll and critical vendor payments. The final hearing cannot happen until at least 14 days after the motion has been served on creditors.5Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 4001 At that final hearing, affected creditors, especially anyone facing a priming lien, can object. The judge must find that the financing is necessary, the terms reasonable, and existing creditors adequately protected before authorizing the full facility.
One boundary worth flagging: a Chapter 11 debtor with enough liquid assets on hand may not need a DIP loan at all. Spending existing cash that a pre-petition lender has a security interest in (“cash collateral”) is governed by Section 363 and requires either the secured creditor’s consent or a court order showing adequate protection. Many large cases use both, a cash collateral order plus a DIP facility, but a debtor with sufficient cash and a cooperative secured lender may never need to borrow new money at all.
What the Loan Agreement Typically Requires
DIP agreements are not ordinary loan documents. They impose tight operational controls, most of which have to be disclosed to the court under Rule 4001.
Budgets and Milestones
Nearly every DIP loan comes with a detailed cash-flow budget, typically 13 weeks, that restricts how the debtor can spend the borrowed money. The debtor reports against the budget regularly, often weekly, and material deviations can trigger default. Milestones are date-specific targets: file a plan by a certain date, complete a sale process in a set window, reach a deal with key creditors on schedule. Missing one gives the lender grounds to stop funding. These controls protect the lender’s money and, at the same time, push the case toward resolution instead of letting it drift.
Carve-Outs for Professional Fees
A DIP lender with a super-priority claim and liens on everything could theoretically leave nothing for the professionals running the case: the debtor’s lawyers, its financial advisors, and the professionals retained by the unsecured creditors’ committee. DIP agreements almost always include a “carve-out” reserving a pool of money to pay those fees regardless of what happens with the loan. Many bankruptcy courts insist on a reasonable carve-out as a condition of approving the DIP order.
Roll-Ups
A roll-up converts a lender’s pre-petition debt into the new super-priority DIP loan. A bank owed $50 million before the filing that agrees to provide $20 million in new DIP money might roll all $70 million into super-priority status. The bank gets better protection for its old exposure as the price of the new money. Roll-ups are one of the most contested provisions in bankruptcy practice because they effectively move pre-petition debt to the front of the line in a way that arguably circumvents the Code’s priority scheme, and courts scrutinize them for whether they are actually necessary to attract the financing.
What DIP Financing Costs
Lending to a bankrupt company is expensive by design. DIP loans carry interest rates, origination fees, commitment fees, and sometimes exit fees well above what healthy companies pay. In early 2025, many DIP facilities carried interest rates above 15%, with some in the high teens, and total fee packages on certain deals exceeded 20% of the loan amount once commitment fees, exit fees, and other charges were stacked on top.
Not every deal is that expensive. Smaller facilities with strong collateral coverage and cooperative lenders have been approved with single-digit rates and modest fees. Pricing depends on the debtor’s condition, the value and quality of available collateral, competitive dynamics in the DIP lending market, and whether the existing secured lender is the one providing the new money, which tends to lower cost because the lender already knows the business. The judge acts as a check on pricing by having to find the terms reasonable before signing the order.
When DIP Financing Fails or Defaults
If a company cannot line up DIP financing, or defaults on the loan it has, the consequences move fast. Without operating cash, the debtor usually cannot last long enough to propose and confirm a plan. The typical outcomes are a quick sale of assets under Section 363 or conversion of the case from Chapter 11 to Chapter 7, which puts a court-appointed trustee in charge and liquidates the estate.
A default on an existing DIP loan is just as damaging. Default provisions let the lender cut off funding, and the court may lift the automatic stay so the DIP lender can go directly against its collateral. At that point the reorganization is effectively over. That is why the milestones and budget controls in a DIP agreement have real teeth: ignoring them can cost the debtor its financing and, with it, any realistic path out of bankruptcy.