Glossary

DIP Financing

Also known as: DIP Loan, Debtor-in-Possession Financing, DIP

New credit extended to a Chapter 11 debtor after its bankruptcy filing, approved by the bankruptcy court, to fund operations, capital needs, or plan costs during the case — typically granted priority ahead of most or all pre-petition claims as an inducement to the new lender.

Because pre-petition lenders are stayed from exercising remedies but the property still requires funding — debt service on non-defaulted tranches, operating shortfalls, tenant improvements needed to preserve leasing momentum, or completion costs on a stalled construction project — DIP financing fills the gap. Bankruptcy Code Section 364 allows the court to grant a DIP lender administrative priority, a priming lien senior to existing liens (even over an incumbent lender's objection, provided that lender's interest remains adequately protected), or both, which is why DIP loan terms and the accompanying DIP financing order are frequently the subject of intense negotiation among the debtor, the incumbent secured lender, and any competing outside DIP lender. Existing lenders often provide the DIP facility themselves — a so-called defensive DIP — specifically to retain control over the case's trajectory and protect their pre-petition position, rather than cede that leverage to an outside, opportunistic lender willing to prime them.