DIP Financing
Definition
Debtor-in-possession (DIP) financing is new money lent to a company after it files Chapter 11, funding operations and the case itself. Because post-petition lending is risky, the Bankruptcy Code (section 364) lets courts grant DIP lenders powerful protections: super-priority administrative claims, priming liens ahead of existing secured debt (with adequate protection), and tight covenants and milestones.
DIP loans are typically expensive, short-tenored, and senior to virtually everything, which historically has made them very low-loss instruments. Existing secured lenders often provide the DIP themselves (a "defensive DIP") to control the case, and DIP terms — milestones requiring a quick 363 sale or plan — frequently steer the outcome.
A common structure is the "roll-up," where part of the DIP refinances the lender's pre-petition debt into the super-priority facility, improving that lender's position (courts scrutinize these).
Why interviewers ask
"How does a bankrupt company fund itself?" is a standard restructuring question — the answer is DIP financing plus cash collateral. Interviewers probe why lenders line up for bankrupt borrowers (super-priority, priming liens, economics, control via milestones).
Related terms
Interviews don't test definitions — they test recall under pressure.
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