DIP Financing in Chapter 11: Keeping the Lights On After Filing
- Melissa A. Youngman
- 6 days ago
- 8 min read
Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.
Filing for Chapter 11 does not stop a business's need for cash. Payroll runs the day after the petition. Suppliers require payment for goods already ordered. Utilities continue. Insurance renews. A business that enters Chapter 11 with no access to working capital will struggle to survive long enough to confirm a plan.
Debtor-in-possession (DIP) financing is the tool Congress built to solve that problem. Governed by 11 U.S.C. § 364, DIP financing gives a Chapter 11 debtor the legal framework to borrow money after the petition date, on terms that may be more favorable to a post-petition lender than any pre-petition credit facility could offer. For a Central Florida business filing in the Middle District of Florida, understanding what DIP financing is, how it is approved, and when it makes sense compared to relying on cash collateral alone can determine whether a case get confirmed.
This post is for business owners and their advisors working through the financing options available in a Chapter 11 case. It addresses DIP financing from the ground up: statutory authority, structure, the key negotiated provisions (priming liens, carve-outs, and roll-ups), and practical considerations for smaller debtors.
What DIP Financing Is and How § 364 Authorizes It
Section 364 of the Bankruptcy Code is the statute that governs a debtor-in-possession's authority to obtain credit after filing. The section works in escalating tiers, each offering the lender a progressively stronger incentive to extend credit to a company that is, by definition, in financial distress.
The lowest tier, § 364(a), allows the DIP to incur unsecured debt in the ordinary course of business. Suppliers who continue shipping on open account after the filing date are extended ordinary-course unsecured credit under this provision. No court order is required.
The next tier, § 364(b), allows the debtor to obtain unsecured credit outside the ordinary course of business, but only with court approval after notice and a hearing. The post-petition loan is treated as an administrative expense claim, meaning it is paid ahead of pre-petition unsecured claims. For many institutional lenders, that priority is not sufficient incentive when the debtor already has secured creditors with claims against most or all of its assets.
The stronger tiers are § 364(c) and § 364(d). Section 364(c) authorizes the court to grant a post-petition lender a superpriority administrative expense claim (§ 364(c)(1)), a lien on unencumbered assets (§ 364(c)(2)), or a junior lien on assets that are already encumbered (§ 364(c)(3)). Section 364(d) goes further still: it allows a priming lien that moves the new DIP lender's interest ahead of an existing pre-petition lienholder. Each of these tiers requires notice to creditors and a court hearing. Each represents a heavier ask, and each produces more friction in negotiation.
Priming Liens: Moving a New Lender Ahead of Existing Secured Creditors
Section 364(d) gets more attention in DIP negotiations than any other provision in the section, because it authorizes the court to let the new DIP lender prime a creditor who already holds a security interest in the same collateral. A priming lien does exactly what the name suggests. It elevates the new lender's lien above the existing one.
Courts may grant a priming lien only if two conditions are met. First, the debtor must be unable to obtain the credit it needs on less burdensome terms. Second, the interest of the lienholder being primed must be adequately protected. Adequate protection, a concept rooted in both the Fifth Amendment's Takings Clause and the Bankruptcy Code (see § 361), compensates the existing secured creditor for any diminution in the value of its collateral interest while the case proceeds. Common forms of adequate protection include replacement liens on unencumbered assets, periodic cash payments to the affected creditor, and enhanced reporting that gives the existing lender visibility into the collateral's condition.
In practice, a contested priming lien fight often resolves before the hearing reaches the merits. The existing secured lender will typically either consent to the priming in exchange for concessions in the DIP order (milestones, cash management controls, events of default that benefit the pre-petition lender), or it will step forward as the DIP lender itself, eliminating the priming issue entirely. The latter path, where the pre-petition lender converts or supplements its existing facility into a DIP arrangement, is common in cases where the relationship lender has the capital and the willingness to support a reorganization rather than pursue stay relief.
Carve-Outs: Professional Fees and the Limits of a DIP Lender's Priority
A DIP facility that grants the lender a superpriority claim and a blanket lien on all assets raises an immediate practical question: how does the debtor's own attorney get paid? The answer, in virtually every DIP order, is the carve-out.
A carve-out is a negotiated dollar amount that is carved out from the DIP lender's superpriority and lien claims, reserved for the payment of professional fees (counsel for the debtor, financial advisors, if any) and U.S. Trustee quarterly fees. Without a carve-out, a DIP lender with a first-priority claim on substantially all assets could, in theory, argue that its superpriority and lien position reaches ahead of professional compensation. No reorganization can proceed if the debtor cannot retain and pay counsel, and DIP lenders generally accept the carve-out as a structural feature of the order rather than a concession.
Carve-outs are negotiated line items in the DIP term sheet. The amount depends on the projected cost of the case, the DIP lender's willingness to accept a senior charge, and whether committee professionals are in the picture. MDFL practice is directly relevant here. In the Middle District of Florida, the United States Trustee typically appoints an unsecured creditors' committee only in larger, more complex Chapter 11 cases with a sizeable creditor class. For most small and mid-size business reorganizations filed in this district, no committee is formed, and unsecured creditors act individually or not at all. A DIP carve-out in a typical MDFL small business case therefore covers debtor's professionals only, not committee counsel and financial advisors. That materially narrows the carve-out budget the DIP lender must absorb.
Roll-Ups: Converting Pre-Petition Debt Into Post-Petition DIP Debt
A roll-up occurs when a DIP credit facility allows some or all of the pre-petition debt owed to the same lender to be re-characterized as post-petition DIP debt, and thereby elevated from a frozen pre-petition secured claim (subject to the automatic stay and the bankruptcy plan process) to a post-petition obligation governed by the DIP order.
From the lender's perspective, a roll-up is attractive for a straightforward reason. It converts debt that is frozen in bankruptcy into an obligation the debtor must honor under the DIP terms, on the DIP schedule, with DIP remedies available if the debtor defaults. From the debtor's perspective, a roll-up can be a reasonable concession when the pre-petition lender is the only available source of DIP financing and the reorganization cannot proceed otherwise.
Courts scrutinize roll-ups because they can disadvantage other creditors. A lender whose pre-petition balance is rolled up extracts favorable treatment for that balance outside of the plan confirmation process, ahead of creditors who have no equivalent leverage. The question before the court, broadly, is whether the roll-up is a necessary and appropriate condition of obtaining the DIP credit on terms the estate can absorb. Counsel who understands this tension can often structure roll-up provisions that are defensible in court while preserving the estate's ability to propose a plan that remaining creditors can support.
DIP Financing vs. Cash Collateral: The Practical Choice for Small Business Debtors
Not every Chapter 11 debtor needs a DIP credit facility. Many small and mid-size businesses in the Middle District of Florida enter Chapter 11 with enough operating cash to fund the case, provided they can use that cash without being halted by a secured lender's claim to it.
Cash collateral is defined in 11 U.S.C. § 363(a): it is cash, negotiable instruments, and other cash equivalents in which the estate holds an interest and in which another entity also holds an interest, typically because the cash represents proceeds of collateral securing a pre-petition loan. Under § 363(c)(2), a debtor may use cash collateral only with the secured creditor's consent or with court authorization following adequate protection under § 363(e).
The practical cost-benefit comparison between relying on cash collateral alone and obtaining a DIP credit facility comes down to a few variables. Using cash collateral avoids borrowing costs, origination fees, and the governance framework of a formal DIP order, but it limits the debtor to the cash already on hand (including postpetition revenues) and requires the existing secured lender's ongoing cooperation. A DIP credit facility provides a new capital source (not merely the right to use existing cash) and can fund first-day motion obligations, critical vendor payments, or capital expenditures that the existing cash position cannot cover. The right answer depends on the debtor's starting cash balance, the existing lender's posture toward the reorganization, and the financing demands projected across the full case timeline.
Central Florida Considerations: DIP Practice in the MDFL
For a business headquartered in Winter Park, Maitland, Orlando, Kissimmee, Lake Mary, Oviedo, or elsewhere in Orange, Seminole, Osceola, Volusia, or Brevard County, DIP financing plays out before judges in the Orlando Division of the Middle District of Florida. The Orlando Division handles a substantial number of small and mid-size business Chapter 11 cases, and local practitioners have developed consistent norms around first-day motion practice, the timeline from petition to an interim DIP order, and the standards for scheduling a final DIP hearing.
For smaller debtors without an institutional DIP lender waiting in the wings, asset-based lenders and community banks familiar with MDFL practice are sometimes available. In many cases, the existing relationship lender agrees to convert or supplement its facility into a DIP arrangement rather than pursue stay relief and risk a contested collateral-value fight. Pre-petition conversations with counsel and with the existing lender, before the petition date, are routinely the most important factor in whether the debtor enters the case with a usable DIP order in hand or spends its first weeks managing an emergency cash-collateral motion with no long-term financing agreed.
Melissa Youngman, Esq. and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For more on Chapter 11 as a restructuring tool for Central Florida businesses, see our cornerstone guide on Chapter 11 bankruptcy in Florida.
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Melissa Youngman is licensed to practice law in the State of Florida and regularly represents debtors, creditors, and other parties in interest in the United States Bankruptcy Court for the Middle District of Florida. This blog addresses issues under federal bankruptcy law and Florida state law; the outcome of any specific matter depends on its particular facts and on statutes, rules, and case law that may have changed after the date of publication.
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