DIP Financing: 2026 Guide to Debtor-in-Possession Loans in Bankruptcy
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DIP Financing: 2026 Guide to Debtor-in-Possession Loans in Bankruptcy

DIP Financing: How Debtor-in-Possession Loans Work in Chapter 11

DIP Financing: How Debtor-in-Possession Loans Work in Chapter 11
DIP Financing: 2026 Guide to Debtor-in-Possession Loans in Bankruptcy

By CT Acquisitions Editorial Team, reviewed by senior M&A advisors. Last reviewed: June 2026.

DIP financing (debtor-in-possession financing) is court-approved credit extended to a company after it files Chapter 11 bankruptcy, giving the lender a super-priority administrative expense claim and, in most cases, a priming lien that jumps ahead of pre-petition secured creditors under 11 U.S.C. Section 364. The Chapter 11 debtor uses the proceeds to fund payroll, buy inventory, and pay vendors while it restructures or runs a Section 363 sale, and the DIP lender gets first dollars out of any recovery. The 2023-2025 wave of large filings (SVB Financial, Diamond Sports, Bed Bath & Beyond, Rite Aid, WeWork) made DIP loans one of the highest-yielding senior credit products in the market, drawing capital from Apollo Global Management, Cerberus Capital Management, JPMorgan Chase, Wells Fargo, Sixth Street, and dedicated distressed funds.

What is DIP financing in plain English?

DIP financing is a loan a company takes out after filing Chapter 11, with bankruptcy court approval, that lets the business keep operating while it reorganizes. The lender receives a court-blessed super-priority claim under Section 364(c)(1), often a priming lien on collateral under Section 364(d), and repayment terms that put it first in line ahead of every other unsecured creditor and, in most priming DIPs, ahead of pre-petition secured lenders.

The term “debtor-in-possession” refers to the Chapter 11 filer itself. In a standard Chapter 11 case, the company keeps control of its assets and operations rather than surrendering them to a trustee, so it is literally the debtor still in possession of its business. See our companion piece on Chapter 11 reorganization for the full case flow. The DIP loan is the funding mechanism that makes staying in possession possible; without cash, a filer usually cannot pay Monday’s payroll, and the case collapses into a Chapter 7 liquidation.

According to the American Bankruptcy Institute, roughly 65 to 75 percent of large Chapter 11 cases (assets over $100 million) use DIP financing, while smaller Subchapter V filings use it far less often because they lack collateral to secure a new loan. Debtwire’s 2024 Restructuring Databook tracked over $28 billion of DIP commitments across 44 large corporate filings.

Why the lender agrees to fund a bankrupt company

The answer sits in the Bankruptcy Code. Under Section 364, the court can grant a DIP lender protections no other creditor gets: super-priority administrative status, senior liens that prime existing collateral, and, in some deals, a court-approved roll-up that converts pre-petition debt into post-petition DIP debt. Combined with all-in pricing that often runs SOFR plus 700 to 1,200 basis points on a nine to eighteen month term, DIP loans typically deliver double-digit annualized yields with structural protections that rival first-lien term loans in performing credit.

The legal foundation: 11 U.S.C. Section 364

Every DIP loan lives inside Section 364 of the Bankruptcy Code, which sets four escalating tiers of borrowing authority. The debtor must climb the ladder in order, asking the court for each successive level only if the tier below cannot attract capital. Understanding this ladder tells you why priming DIPs almost always require a fight.

Section 364(a): ordinary course unsecured credit

Section 364(a) lets the debtor incur unsecured debt in the ordinary course of business without a court order, treated as an administrative expense under Section 503(b)(1). This is how vendors extend post-petition trade credit and how a debtor keeps buying supplies. Section 364(a) does not typically fund large DIP loans because sophisticated lenders will not extend meaningful credit on unsecured administrative terms alone.

Section 364(b): court-approved unsecured credit

Section 364(b) permits unsecured borrowing outside the ordinary course of business, but it requires court approval after notice and a hearing. Still administrative-priority only, still rare for real DIP financings, still not enough juice for institutional lenders.

Section 364(c): super-priority and junior liens

Section 364(c) is where actual DIP financing usually starts. It authorizes three flavors of enhanced protection when the debtor cannot obtain unsecured credit: (c)(1) super-priority administrative expense claims that jump ahead of every other administrative claim; (c)(2) liens on unencumbered property; and (c)(3) junior liens on already-encumbered property. Most non-priming DIP loans stack (c)(1), (c)(2), and (c)(3) together.

Section 364(d): priming liens

Section 364(d) is the nuclear option. It allows the DIP lender to receive a senior lien that primes (jumps ahead of) an existing pre-petition secured lender’s collateral position. The debtor must prove two things at a contested hearing: it cannot obtain credit any other way, and the pre-petition lender being primed will receive “adequate protection” of its interest, typically through replacement liens, cash payments, or an equity cushion (In re 495 Central Park Avenue Corp., 136 B.R. 626, Bankr. S.D.N.Y. 1992, set the classic evidentiary test).

Priming fights are where DIP financing gets loud. Existing first-lien lenders often object, sometimes with cause: the U.S. Bankruptcy Court for the Southern District of Texas rejected a priming DIP in In re Aegean Marine Petroleum Network (2019) after finding the debtor had not adequately shopped alternative capital.

DIP loan pricing, size, and structure in 2026

DIP loans are among the most expensive senior secured debt a company will ever take, priced for optionality, execution risk, and the lender’s need to control the case. The 2024-2025 market normalized around all-in yields of 12 to 18 percent for large priming DIPs, with commitment fees, exit fees, and PIK toggles layered on top.

Typical DIP financing terms, 2024-2026 market
Term component Typical range Notes
Facility size $25M to $2.5B+ Bed Bath & Beyond DIP was $240M; Rite Aid initial DIP was $3.45B
Tenor 6 to 18 months Sized to plan of reorganization or 363 sale timeline
Base rate SOFR (Term SOFR 1M or 3M) LIBOR fully retired June 2023
Spread over SOFR 700 to 1,200 bps Wider on priming, contested, or thin-collateral deals
All-in cash coupon 12 to 17 percent Plus fees; PIK can lift effective yield 200 bps
Upfront commitment fee 2 to 5 percent Paid on total facility, not just funded balance
Exit fee 1 to 3 percent Payable at plan effective date or refinance
Undrawn / unused fee 50 to 100 bps On revolver undrawn portion
Roll-up ratio 1:1 to 3:1 (roll-up:new money) Not permitted in every jurisdiction

Not every DIP is expensive. Judge-friendly, low-risk DIPs offered by the existing revolver lender (called a “defensive” or “friendly” DIP) may price at SOFR plus 400 to 600 basis points because the lender already knows the collateral and is protecting an existing position. Wells Fargo and Bank of America regularly extend friendly DIPs to their pre-petition ABL clients.

Judicial pricing pushback

Courts do occasionally push back on DIP economics. In In re Genesis HealthCare (SDNY 2010) and In re Toys “R” Us Property Company II (E.D. Va. 2018), judges required lenders to reduce commitment fees and prepayment penalties before approving the DIP. The 2019 Aegean Marine ruling forced the debtor to run a competing marketing process. Debtors’ counsel now routinely include a “market check” declaration to insulate the pricing from Section 1129 fairness challenges later.

Super-priority administrative expense: what it actually means

A super-priority administrative expense claim under Section 364(c)(1) is not a lien. It is a payment-priority ranking that puts the DIP lender first in line for cash distributions from any recovery, ahead of every other Section 503(b) administrative claim, ahead of all Section 507 priority claims, and ahead of general unsecured creditors. In practice, super-priority means the DIP lender gets paid before professional fees, before tax priority claims, and before employee wage priority claims (subject to a “carve-out” for professional fees and U.S. Trustee fees that is negotiated into the DIP order).

The carve-out: what gets paid before the DIP lender

The carve-out is a court-approved set of expenses that survive the DIP lender’s super-priority. It typically covers: professional fees for the debtor’s counsel, financial advisor, investment banker, and creditors’ committee counsel (subject to a dollar cap, often $5 million to $25 million on large cases); U.S. Trustee statutory fees under 28 U.S.C. Section 1930; and, in some orders, wind-down expenses.

Carve-outs are one of the two or three most negotiated terms in every DIP hearing. In the Bed Bath & Beyond case (In re BBBY LLC, D.N.J. 2023), the creditors’ committee successfully pushed the carve-out from an initial $8 million cap to over $22 million, protecting professional fees against a shortfall. The Diamond Sports Group DIP (In re Diamond Sports Group, S.D. Tex. 2023) included a bifurcated carve-out with separate caps for pre-conversion and post-conversion scenarios.

DIP roll-ups: converting old debt into new

A roll-up is a court-approved conversion of a portion of the lender’s pre-petition claim into DIP debt. Once rolled up, the pre-petition dollars enjoy the same super-priority, priming lien, and payment protections as the new-money DIP tranche. Roll-ups let pre-petition secured lenders improve their claim while extending fresh capital, and they let the debtor negotiate DIP pricing lower because the lender’s overall exposure sits inside the DIP wrapper.

Roll-ups are controversial. Judges in the Southern District of New York, the District of Delaware, and the Southern District of Texas approve them regularly, but judges in some other districts scrutinize them for improper insider treatment. The typical ratio ranges from 1:1 (one dollar rolled up per dollar of new money) to 3:1. The Rite Aid DIP included a $200 million roll-up alongside $3.45 billion of new money; the Diamond Sports DIP rolled up roughly $625 million of pre-petition first-lien term loan.

Roll-up objections and creditor pushback

Unsecured creditors’ committees frequently object to roll-ups, arguing they extract value from the estate without providing meaningful new liquidity. The U.S. Trustee’s office often files a limited objection asking the court to require justification. Judge Sean Lane’s 2020 ruling in In re Windstream Holdings (S.D.N.Y.) reduced a proposed roll-up ratio after finding the pre-petition lender had understated available collateral.

Adequate protection: what pre-petition lenders get when they are primed

Adequate protection is the constitutional and statutory floor for pre-petition secured lenders whose collateral position is subordinated by a Section 364(d) priming lien. The concept comes from Section 361, which lists three non-exclusive forms: cash payments, replacement liens, or “the indubitable equivalent” of the lender’s interest.

In practice, adequate protection usually looks like some combination of the following:

The Third Circuit’s ruling in In re Swedeland Development Group (16 F.3d 552, 3d Cir. 1994) remains the touchstone case: courts must ensure the pre-petition lender ends the case in the same collateral position it started, in economic terms, not nominal terms.

Cash collateral orders and their relationship to DIP financing

Sometimes a Chapter 11 debtor does not need new DIP capital at all. It only needs court permission to keep spending the cash it already has, which becomes “cash collateral” under Section 363(a) the moment the case is filed. A cash collateral order under Section 363(c)(2) authorizes the debtor to use encumbered cash in exchange for adequate protection to the pre-petition secured lender, without introducing a new DIP lender.

Cash collateral orders are common in mid-market cases where the pre-petition lender does not want to fund new money but does not want the case to collapse either. They are cheaper than DIP loans because there is no commitment fee, no exit fee, and no roll-up. The trade-off: the debtor gets no incremental liquidity, so cash collateral only works if the debtor is not burning cash.

First-day motions: how DIP financing gets approved in 24 to 48 hours

Every large Chapter 11 case opens with a set of first-day motions filed on or within hours of the petition date. Interim DIP approval is typically the third or fourth motion heard. The court can approve interim access to a portion of the DIP facility (usually 20 to 40 percent of the total commitment) under Bankruptcy Rule 4001(c), pending a final hearing 21 to 45 days later.

The standard first-day DIP sequence

  1. Petition filed at time zero, typically before market open
  2. First-day declaration from the CRO or CFO explaining case background, DIP need, and 13-week cash forecast
  3. Motion for interim DIP order filed within hours, requesting interim borrowing authority sized to bridge to the final hearing
  4. Notice and hearing within 24 to 72 hours of filing, subject to local rules
  5. Interim DIP order entered authorizing partial draws
  6. Final DIP hearing 21 to 45 days later, opening the full facility

The interim-to-final gap gives creditors and the U.S. Trustee time to object, negotiate the carve-out, contest the roll-up, and challenge the pricing. It also gives the debtor breathing room to run vendor payment programs, honor customer commitments, and stabilize operations.

Section 363 sale financing: when DIP funds a going-concern sale

Many DIP loans are structured explicitly to fund a Section 363 asset sale rather than a plan of reorganization. Section 363(b) allows the debtor to sell substantially all assets outside a plan, with court approval and typically an auction. The DIP lender funds operations and sale expenses through closing, and the sale proceeds pay off the DIP first.

In “stalking horse” DIP structures, the DIP lender is also the stalking horse bidder for the assets. This aligns the lender’s economic interest with the sale outcome, but it also creates conflict-of-interest scrutiny. The court will typically require an independent director or CRO to sign off on the sale process, and competitive bidding procedures under Bankruptcy Rule 6004 must let other buyers overbid.

Bed Bath & Beyond, Rite Aid, and Diamond Sports all used DIP financing to fund Section 363 processes, with mixed results. For a broader view of distressed M&A dynamics, see our guide on how to sell a business in 2026, which covers going-concern sales and asset-only structures.

Who provides DIP financing? The lender landscape in 2026

The DIP lender universe splits roughly into four camps: money-center banks providing friendly DIPs to existing clients, dedicated distressed-credit funds, non-bank direct lenders, and hedge funds. Post-Silicon Valley Bank collapse, the balance has tilted toward non-bank capital because regulatory pressure has made banks more conservative on incremental exposure to filers.

Major DIP lenders and their typical deal profile, 2024-2026
Lender category Representative firms Typical deal profile
Money-center banks (friendly DIPs) JPMorgan Chase, Bank of America, Wells Fargo, Citibank Existing ABL client, defensive DIP, SOFR + 400 to 600 bps
Distressed-credit funds Apollo Global Management, Cerberus Capital Management, Oaktree Capital, Centerbridge Partners Priming loan-to-own, large cases, SOFR + 900 to 1,200 bps
Non-bank direct lenders Ares Management, Blue Owl Capital, Sixth Street Partners, Antares Capital Mid-market to large-cap, term loan DIPs, LBO refinancings
Hedge funds Silver Point Capital, Elliott Investment Management, Anchorage Capital Activist DIP positions, roll-ups, credit bidding strategies
Government / quasi-government SBA (rare), state pension co-investors Municipal filers, healthcare, education

Apollo has emerged as the most active large-case DIP lender since 2022, funding portions of the Yellow Corp., Envision Healthcare, and SVB Financial DIPs. Cerberus and JPMorgan syndicated the Rite Aid DIP. Sixth Street funded significant portions of the WeWork and Serta Simmons DIPs. Wells Fargo led the friendly DIP for Bed Bath & Beyond as the pre-petition ABL agent.

Recent large DIP financings and what they teach

Three recent cases illustrate the range of DIP structures a distressed M&A team needs to know.

SVB Financial Group

SVB Financial Group, the holding company parent of the collapsed Silicon Valley Bank, filed Chapter 11 on March 17, 2023 in the Southern District of New York. Unlike its bank subsidiary (which went into FDIC receivership), the holding company retained roughly $2 billion in cash but needed DIP capital to fund case administration and preserve tax attributes. The court approved a $50 million DIP facility funded by pre-petition noteholders, with priming liens on the tax-attribute intercompany claims. The unusually small facility relative to case size reflected the holding company’s cash cushion and the strategic focus on preserving NOLs and preferred equity investments in SVB Capital.

Diamond Sports Group

Diamond Sports Group, the Sinclair Broadcast Group subsidiary that operates the Bally Sports regional networks, filed Chapter 11 on March 14, 2023 in the Southern District of Texas. The DIP included $625 million of new money plus a $625 million roll-up of pre-petition first-lien term loan debt, priced at SOFR plus 800 basis points, with milestones tied to renegotiating broadcast rights with MLB and NBA teams. The case ran nearly two years before emerging as Main Street Sports Group in January 2025, with the DIP repaid from a combination of exit financing and reorganized equity.

Bed Bath & Beyond

Bed Bath & Beyond Inc. filed Chapter 11 on April 23, 2023 in the District of New Jersey. The DIP was a $240 million facility from Sixth Street Specialty Lending, structured to fund a Section 363 wind-down and going-out-of-business sales rather than reorganization. Overstock (later renamed Beyond, Inc.) acquired the intellectual property, e-commerce assets, and trademarks for $21.5 million in June 2023, with the physical store leases rejected and inventory liquidated by Hilco Merchant Resources. The DIP funded roughly 90 days of operations plus wind-down expenses.

Rite Aid Corporation

Rite Aid Corporation filed Chapter 11 on October 15, 2023 in the District of New Jersey, then a second time on May 5, 2025 after its first reorganization failed. The initial DIP was one of the largest of the decade: $3.45 billion in new money, led by Bank of America as agent for a syndicate including JPMorgan, Wells Fargo, and Ares, priced at SOFR plus 500 basis points for the ABL tranche and SOFR plus 850 basis points for the term loan tranche. The case emerged in September 2024 as a private company owned by former lenders, then re-filed in 2025 for going-concern sale to CVS, Walgreens, and regional pharmacy operators.

DIP financing versus other Chapter 11 funding tools

How DIP financing compares to alternatives
Tool Priority New capital? Typical use case
DIP loan (Section 364) Super-priority, priming lien possible Yes Working capital, sale funding, reorganization runway
Cash collateral (Section 363) Existing lien, adequate protection to pre-petition lender No (uses existing cash) Debtor has cash on hand, just needs use authority
Exit financing New senior debt at plan effective date Yes Refinances DIP at emergence, funds ongoing operations
Rights offering New equity to existing creditors Yes Recapitalizes emerging entity, converts unsecured claims
Section 363 credit bid Pre-petition lender bids its debt as purchase currency No new money Loan-to-own outcome, lender takes the assets
Trade credit (Section 364(a)) Administrative expense only Limited Vendor extension, ordinary course purchasing

Most large Chapter 11 cases use two or three of these tools simultaneously. A typical middle-market filing might use a cash collateral order for the first 30 days while negotiating a proper DIP facility, then convert to a Section 364 DIP with a small roll-up, then refinance the DIP with exit financing at plan confirmation.

Common DIP loan covenants and milestones

DIP lenders control the case through covenants and milestones, not just pricing. These terms drive management behavior far more than the interest rate.

Financial covenants

Case milestones

Milestone violations are the fastest way for the DIP lender to shift the case toward a Section 363 sale or a foreclosure. In the Yellow Corp. case (In re Yellow Corp., D. Del. 2023), missed milestones forced the debtor into a rolling series of asset auctions rather than a plan of reorganization, ultimately delivering better recoveries but on a compressed timeline.

DIP loan documentation: the credit agreement and interim order

A DIP financing package includes two core documents plus a stack of exhibits. The credit agreement mirrors a standard senior secured loan agreement, with Chapter 11 modifications. The interim and final DIP orders are the court’s approvals that give the credit agreement its super-priority effect. If the order says something different from the credit agreement, the order wins.

Key DIP order provisions to negotiate

  1. Borrowing base and availability: caps on how much can be drawn per week or per milestone
  2. Budget approval and variance: how tight the 13-week budget is, what triggers default
  3. Roll-up sizing: dollar amount and any conditions on roll-up
  4. Carve-out cap and eligibility: which professionals covered, dollar limits, post-default carve-out
  5. Section 506(c) waiver: does the DIP lender waive surcharge rights against its collateral
  6. Section 552(b) waiver: does the lender preserve equities-of-the-case defense against post-petition collateral erosion
  7. Challenge period: how long the committee has to investigate liens and claims (usually 60 to 90 days)
  8. Cross-collateralization: does the DIP lien secure both new money and rolled-up debt (usually yes)
  9. Marketing period restrictions: minimum time for competing bids in Section 363 sales

What can go wrong with DIP financing

DIP loans fail more often than the headlines suggest. Understanding the failure modes protects both borrowers and lenders.

Failure mode 1: budget breach

The debtor misses the 13-week budget by more than the permitted variance, usually because vendors demand cash-on-delivery instead of net-30, or because a customer defection reduces receipts. Cure options include a covenant reset (rare), a budget amendment (common in cooperative cases), or default acceleration (rare unless the case is failing overall).

Failure mode 2: adequate protection dispute

The pre-petition secured lender challenges adequate protection mid-case as collateral values decline. Courts sometimes require additional cash payments, additional replacement liens, or a shortening of case milestones. In extreme cases, the court will lift the automatic stay to let the pre-petition lender foreclose.

Failure mode 3: administrative insolvency

The estate runs out of cash before emergence, unable to pay professional fees, U.S. Trustee fees, and post-petition trade claims. Administrative insolvency triggers a Chapter 11 conversion to Chapter 7 or a structured dismissal. The DIP lender may consent to a wind-down budget to avoid the surprise of unpaid administrative claims.

Failure mode 4: DIP challenge by committee

The unsecured creditors’ committee investigates the pre-petition liens (during the challenge period) and finds a defect: unperfected security interest, avoidable preference, fraudulent transfer, or lien on the wrong asset. A successful challenge unwinds the roll-up and can subordinate the pre-petition portion of the DIP.

Failure mode 5: sale process shortfall

The Section 363 sale delivers less than the DIP balance plus carve-out plus accrued professional fees. The remaining estate has no assets to distribute to unsecured creditors, and even the DIP lender takes a haircut. This is where DIP lenders sometimes convert to owners through credit bidding.

Credit bidding: when the DIP lender buys the company

Under Section 363(k), a secured creditor whose collateral is being sold can bid its debt as the purchase price rather than paying cash. This “credit bid” right lets the DIP lender acquire the collateral for the face amount of its claim, effectively converting distressed debt into equity ownership. Credit bidding is common in loan-to-own DIP structures where the lender never expected cash repayment.

Credit bidding limits exist. Judge Christopher Sontchi’s ruling in In re Fisker Automotive Holdings (D. Del. 2014) capped credit bidding at the cash purchase price actually paid for the debt when the lender had bought the loans at a discount, protecting the estate from unfair enrichment. The Supreme Court’s decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank (566 U.S. 639, 2012) confirmed that secured creditors have a statutory right to credit bid in most Section 363 sales, and the debtor cannot exclude them via a plan of reorganization.

DIP financing and cross-border cases

Chapter 15 recognition of foreign main proceedings adds complexity. When a foreign debtor files Chapter 15 in the United States to protect U.S. assets, DIP financing typically follows the foreign law of the main proceeding rather than U.S. Section 364 rules. The U.S. Bankruptcy Court may grant provisional relief under Section 1519 that mirrors DIP protections, but the actual credit terms live in the foreign case.

Cross-border DIPs became common during 2020-2024 with the failures of Voyager Digital, Celsius Network, FTX Trading, and 3AC. The FTX Chapter 11 filed in the District of Delaware included DIP-like protections for the U.S. debtor entities, coordinated with parallel proceedings in the Bahamas, Cyprus, and the British Virgin Islands.

DIP financing for smaller businesses: Subchapter V and DIP-lite structures

Subchapter V of Chapter 11, enacted by the Small Business Reorganization Act of 2019, streamlines Chapter 11 for businesses with debts under a temporary $7.5 million cap (currently reverted to $3,024,725 as of June 21, 2024, after Congress let the raised cap expire). Subchapter V debtors rarely obtain traditional DIP financing because their asset bases cannot support the fees, and the case timelines (90 days to file plan, roughly 6 months to confirmation) do not fit a typical DIP maturity schedule.

For small-business filers who need liquidity, alternatives include:

Sub V DIP loans, when they happen, tend to be $500,000 to $5 million from local or regional banks with an existing relationship to the debtor.

The tax treatment of DIP loans

DIP loan interest is generally deductible as a business expense under IRC Section 163, though the debtor’s ability to use the deduction depends on taxable income, NOL utilization limits under IRC Section 382, and cancellation-of-indebtedness income under IRC Section 108. DIP loan origination fees are typically capitalized and amortized over the loan term, and any exit fee paid at plan effective date may be deductible in the year of payment.

The bigger tax question is not the DIP itself but the plan of reorganization. Whether Section 382 limits apply, whether the case qualifies for the G-reorganization safe harbor, and whether the reorganized entity can preserve NOLs all depend on stock ownership changes at emergence. See our companion tax pieces on F-reorganizations and QSBS Section 1202 for related structuring considerations.

DIP loans and the M&A process

For business owners who are not in bankruptcy but who wonder how DIP financing intersects with a sale, the connection runs through distressed M&A. If a target company is a Chapter 11 debtor, the acquisition typically closes as either a Section 363 sale (assets only, free and clear of most liens and claims) or a plan of reorganization (equity or asset transfer at plan effective date). In both cases, the DIP loan gets paid off at closing from sale proceeds or exit financing.

Buyers of distressed businesses gain three things from the DIP structure: a clean chain of title (Section 363(f) authorizes sale free and clear), predictable timing (sale procedures orders lock in bid dates and closing dates), and negotiated liability treatment (successor liability doctrines are typically cut off by the sale order). See buy-side M&A advisory for how strategic and PE buyers navigate distressed processes.

Sellers approaching distress: what to do before you file

If you own a lower-middle-market business that is running out of cash but has real enterprise value, the choice between filing Chapter 11 with DIP financing and running a pre-filing distressed sale is one of the most consequential decisions you will make. Chapter 11 with DIP costs $2 million to $30 million+ in professional fees on smaller cases, takes 6 to 24 months, and delivers publicity you cannot undo. A well-run pre-filing distressed process may deliver similar cash to unsecured creditors and preserve equity value without those costs.

Our approach to distressed M&A at CT Acquisitions

CT Acquisitions represents lower-middle-market sellers with enterprise values from $5 million to $50 million. For distressed situations, that means we run two parallel tracks in parallel with distressed counsel: a going-concern sale process to strategic and PE buyers who value operating assets, and a wind-down or Chapter 11 preparation track if the sale process cannot close in time.

What sets our LMM approach apart:

If your business is showing early stress signals (declining EBITDA, tightening covenants, vendor pressure), the right time to talk to an M&A advisor is 6 to 18 months before you would consider filing, not 30 days before. Schedule a 30-min exit-readiness call at ctacquisitions.com/contact-us/.

Frequently Asked Questions

How does DIP financing work?

DIP financing works by extending court-approved credit to a Chapter 11 debtor under Section 364 of the Bankruptcy Code. The lender receives a super-priority administrative claim, often a priming lien on collateral, and repayment ahead of every other creditor. The debtor uses the loan to pay payroll, buy inventory, and fund operations while it reorganizes or runs a Section 363 sale, then repays the DIP at plan confirmation or sale closing.

Who provides DIP financing?

The largest DIP lenders in the 2024-2026 market include Apollo Global Management, Cerberus Capital Management, JPMorgan Chase, Bank of America, Wells Fargo, Sixth Street Partners, Ares Management, Silver Point Capital, and Oaktree Capital. Money-center banks typically fund defensive DIPs for existing clients at SOFR plus 400 to 600 basis points, while distressed-credit funds fund contested priming DIPs at SOFR plus 900 to 1,200 basis points.

How expensive is DIP financing?

DIP financing all-in yields typically run 12 to 18 percent on priming loans, including SOFR plus 700 to 1,200 basis points on the coupon, a 2 to 5 percent upfront commitment fee, a 1 to 3 percent exit fee, and possible PIK toggles. Friendly DIPs from existing lenders can price closer to 8 to 11 percent all-in. The Rite Aid DIP priced at SOFR plus 500 to 850 basis points depending on tranche; the Diamond Sports DIP priced at SOFR plus 800 basis points.

What is a DIP roll-up?

A DIP roll-up is the court-approved conversion of a portion of the lender’s pre-petition claim into DIP debt, giving those dollars super-priority and priming lien status. Typical ratios range from 1:1 to 3:1 (rolled-up dollars per new-money dollar). Roll-ups let pre-petition secured lenders improve their claim while extending fresh capital, but they draw objections from unsecured creditors’ committees who argue they extract value without new liquidity.

What is a priming lien in DIP financing?

A priming lien under Section 364(d) is a court-approved senior security interest that jumps ahead of an existing pre-petition secured lender’s lien on the same collateral. The debtor must prove it cannot obtain credit any other way and that the pre-petition lender receives adequate protection (replacement liens, cash payments, or equity cushion). Priming DIPs are common in loan-to-own structures and contested cases.

How long does DIP financing last?

DIP loan tenors typically run 6 to 18 months, sized to the case timeline. A DIP funding a Section 363 sale may mature in 90 to 180 days, aligned with the auction and closing schedule. A DIP funding a plan of reorganization typically runs 12 to 18 months, aligned with disclosure statement approval, confirmation hearing, and plan effective date. Maturity extensions are common if the case takes longer than expected.

What is the difference between DIP financing and exit financing?

DIP financing funds the debtor during Chapter 11, from petition date through plan effective date, under Section 364 priority. Exit financing funds the reorganized entity on the day it emerges from Chapter 11, refinances the DIP, and provides working capital for the post-emergence business. Exit financing is priced closer to a normal senior secured loan (SOFR plus 400 to 700 basis points), because it exits bankruptcy jurisdiction and enters standard commercial credit markets.

Can a Chapter 11 debtor operate without DIP financing?

Yes, when the debtor has enough cash on hand and can secure a cash collateral order under Section 363. Roughly 25 to 35 percent of large Chapter 11 cases operate solely on cash collateral without a DIP loan, particularly when the pre-petition lender does not want to fund new money but consents to cash use in exchange for adequate protection. Subchapter V cases and smaller Chapter 11s rarely have DIP financing at all.

Primary sources and further reading

  1. 11 U.S.C. Section 364 (Bankruptcy Code, obtaining credit): law.cornell.edu/uscode/text/11/364
  2. 11 U.S.C. Section 363 (Bankruptcy Code, use, sale, or lease of property): law.cornell.edu/uscode/text/11/363
  3. 11 U.S.C. Section 361 (Bankruptcy Code, adequate protection): law.cornell.edu/uscode/text/11/361
  4. 11 U.S.C. Section 507 (priorities): law.cornell.edu/uscode/text/11/507
  5. Federal Rule of Bankruptcy Procedure 4001(c) (obtaining credit): law.cornell.edu/rules/frbp/rule_4001
  6. American Bankruptcy Institute Journal, “DIP Financing Trends 2024”: abi.org/abi-journal
  7. Debtwire Restructuring Databook 2024: debtwire.com/research
  8. Reorg Research DIP financing tracker: reorg.com
  9. PACER docket, In re SVB Financial Group, Case No. 23-10367 (Bankr. S.D.N.Y.): pacer.uscourts.gov
  10. PACER docket, In re Diamond Sports Group, LLC, Case No. 23-90116 (Bankr. S.D. Tex.): pacer.uscourts.gov
  11. PACER docket, In re BBBY LLC, Case No. 23-13359 (Bankr. D.N.J.): pacer.uscourts.gov
  12. PACER docket, In re Rite Aid Corp., Case No. 23-18993 (Bankr. D.N.J.): pacer.uscourts.gov
  13. PACER docket, In re Yellow Corp., Case No. 23-11069 (Bankr. D. Del.): pacer.uscourts.gov
  14. In re 495 Central Park Avenue Corp., 136 B.R. 626 (Bankr. S.D.N.Y. 1992)
  15. In re Swedeland Development Group, 16 F.3d 552 (3d Cir. 1994)
  16. In re Aegean Marine Petroleum Network, 599 B.R. 717 (Bankr. S.D.N.Y. 2019)
  17. In re Fisker Automotive Holdings, 510 B.R. 55 (Bankr. D. Del. 2014)
  18. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012): supreme.justia.com/cases/federal/us/566/639
  19. Small Business Reorganization Act of 2019, Public Law 116-54: congress.gov/bill/116th-congress/house-bill/3311
  20. Executive Office for U.S. Trustees, Chapter 11 Handbook: justice.gov/ust
  21. Administrative Office of the U.S. Courts, bankruptcy statistics: uscourts.gov/statistics-reports
  22. Federal Reserve H.4.1 release (SOFR base rate context): federalreserve.gov/releases/h41
  23. CME Term SOFR historical rates: cmegroup.com/market-data
  24. SEC 8-K filing, SVB Financial Group Chapter 11 announcement, March 17, 2023: sec.gov
  25. SEC 8-K filing, Bed Bath & Beyond Chapter 11 announcement, April 23, 2023: sec.gov
  26. SEC 8-K filing, Rite Aid Chapter 11 announcement, October 15, 2023: sec.gov
  27. Apollo Global Management annual report 2024: apollo.com
  28. Cerberus Capital Management website: cerberus.com
  29. Sixth Street Partners website: sixthstreet.com
  30. Wells Fargo commercial banking capabilities: wellsfargo.com/com
  31. JPMorgan Chase commercial banking DIP capabilities: jpmorgan.com/commercial-banking
  32. Federal Reserve Bank of St. Louis SOFR data (FRED): fred.stlouisfed.org/series/SOFR
  33. American College of Bankruptcy: amercol.org
  34. National Bankruptcy Conference: nbconf.org
  35. Turnaround Management Association Journal of Corporate Renewal: turnaround.org
  36. Fitch Ratings DIP financing structured finance criteria: fitchratings.com
  37. Moody’s Investors Service default and recovery database: moodys.com
  38. S&P Global Ratings LossStats database: spglobal.com/ratings
  39. UCLA-LoPucki Bankruptcy Research Database: lopucki.law.ufl.edu
  40. Weil Gotshal & Manges Bankruptcy Blog: restructuring.weil.com

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