Understanding Debtor-in-Possession (DIP) Financing

Debtor-in-possession financing (also called DIP financing) is a unique form of credit given to individuals or companies undergoing bankruptcy or financial hardship. "Debtor in possession" is the term used to describe an individual who has filed for bankruptcy but continues to own the property that has a lien (property on which he still owes money). This term is also used to describe corporations that have filed Chapter 11 bankruptcy but continue to run business operations.

Debtor-in-possession financing is normally arranged by the person or corporation during the bankruptcy process. It allows homeowners to continue to live in their homes and allows business owners to continue to make incomes while their financial situations are being judged. A business is thus given the opportunity to return to a profitable state of operations following bankruptcy.

Once the bankruptcy proceedings are complete, the person or company is obligated to comply with all court orders and any restrictions the lender puts in place.