DIP Financing Explained: How Companies Fund Operations During Bankruptcy

Business Bankruptcy Comparison

How to File Chapter 11 Bankruptcy

Chapter 11 bankruptcy lets companies restructure debt while maintaining operations. This reorganization tool works best for businesses with steady revenue but overwhelming obligations.

The filing process begins with gathering financial records spanning three years. You'll need tax returns, profit-and-loss statements, balance sheets, and lists of all creditors. Missing documents delay your case by months.

Your petition must include schedules listing every asset, liability, income source, and expense. Accuracy matters. Courts scrutinize discrepancies. Credit counseling is mandatory before filing.

The automatic stay takes effect immediately upon filing. Creditors must stop collection calls, lawsuits, and wage garnishments. This breathing room lets you focus on reorganization without constant harassment.

Cost of Bankruptcy Chapter 11

Chapter 11 bankruptcy carries substantial expenses that catch business owners off guard. Filing fees alone cost $1,738 as of 2025. That's just the beginning.

Attorney fees typically range from $15,000 to $50,000 for small businesses. Complex cases involving multiple creditors or disputed claims push costs higher. Large corporations spend millions navigating Chapter 11 bankruptcy.

Quarterly fees to the U.S. Trustee add up quickly. Businesses pay based on disbursements made during each quarter. The rate starts at $325 for disbursements under $15,000 and scales upward.

Administrative costs include accounting fees, appraisals, and document preparation. Budget an additional $5,000 to $15,000 for these professional services. Most small businesses find Chapter 11 prohibitively expensive. The median case costs $40,000 to $100,000 from start to finish.

Small Business Bankruptcy

Smaller enterprises have streamlined options designed to reduce complexity and cost. Subchapter V of Chapter 11 specifically targets businesses with debts under $7.5 million.

This specialized track eliminates many traditional Chapter 11 requirements. No creditors' committee forms. You don't need to file a disclosure statement. The streamlined process cuts legal fees significantly.

A trustee still monitors your case but plays a less intrusive role. They facilitate negotiations between you and creditors rather than controlling operations. The plan confirmation process moves faster under Subchapter V. Traditional Chapter 11 cases drag on for years. Small business cases typically resolve within 90 days of filing.

Filing Bankruptcy for LLC

Limited liability companies face unique considerations when filing bankruptcy. The company itself can file. Alternatively, individual members might file personal bankruptcy including their ownership interests.

An LLC filing Chapter 11 protects business assets from creditor seizure. The company continues operations under court supervision. Members retain their ownership stakes unless the reorganization plan requires otherwise.

Many LLC owners discover personal guarantees undermine limited liability protection. Banks require personal guarantees for business loans. When the LLC files bankruptcy, guaranteed debts remain enforceable against individual members.

Business Bankruptcy Chapter 7

Chapter 7 bankruptcy terminates business operations permanently. A court-appointed trustee sells all company assets and distributes proceeds to creditors. This liquidation option suits businesses with no viable path forward.

The trustee liquidates everything: machinery, inventory, real estate, intellectual property. Nothing remains. Secured creditors receive payment first from their collateral. Unsecured creditors split whatever money remains, typically receiving pennies on the dollar.

Corporations and partnerships dissolve automatically after Chapter 7 bankruptcy. The business ceases to exist as a legal entity. Employee wages receive priority in distribution. Workers get paid before general unsecured creditors. Tax obligations also rank high.

Chapter 7 costs less than Chapter 11 reorganization. Filing fees run $338. Attorney fees range from $1,500 to $3,500 for straightforward cases. The entire process typically concludes within four to six months.

Business Bankruptcy Laws

Federal law governs all proceedings through the U.S. Bankruptcy Code. Title 11 contains provisions for business reorganization and liquidation. States cannot override these federal statutes.

Automatic Stay Provisions. Automatic stay provisions protect debtors immediately upon filing. Creditors violating the stay face sanctions including monetary penalties. Collection calls end instantly. Wage garnishments halt. Bank levies reverse.

Preference Payments and Clawback Rules. Preference payments create liability for creditors receiving money shortly before bankruptcy. Payments made within 90 days of filing can be recovered by the trustee. This clawback provision ensures fair treatment of all creditors.

Fraudulent Transfer Recovery. Fraudulent transfers allow trustees to undo transactions made to cheat creditors. Selling assets below market value raises red flags. Courts unwind these deals and recover assets for the estate.

Discharge Limitations. Fraud-based debts survive bankruptcy regardless of chapter. Lie on a loan application and that debt remains enforceable forever. Certain taxes remain non-dischargeable. Income taxes less than three years old survive bankruptcy.

Frequently Asked Questions

Can I file bankruptcy for multiple business entities simultaneously?
Yes, related companies often file consolidated bankruptcy cases to streamline proceedings and reduce administrative costs for all entities involved.

What happens to my business bankruptcy if I die during the proceeding?
Corporate bankruptcy continues because the company exists separately from owners, while sole proprietor cases convert to probate proceedings settling the deceased's estate.

Does business bankruptcy affect my ability to obtain professional licenses?
Most professional licensing boards cannot deny or revoke licenses based solely on filings, though they may consider surrounding circumstances like fraud allegations.

Can I convert my Chapter 11 business bankruptcy to Chapter 7 if reorganization fails?
Bankruptcy courts routinely approve conversions from Chapter 11 to Chapter 7 when businesses cannot formulate viable reorganization plans meeting creditor approval requirements.

Are business bankruptcy records permanently public?
Federal bankruptcy filings remain accessible through PACER indefinitely, though credit reporting agencies typically remove notations after seven to ten years.