Obtaining Credit During Chapter 11

Denver bankruptcy attorney Jon B. Clarke can help individuals and businesses obtain credit during and after Chapter 11 bankruptcy proceedings.

Denver bankruptcy attorney Jon B. Clarke can help individuals and businesses obtain credit during and after Chapter 11 bankruptcy proceedings.

The Law Office of Jon B. Clarke, P.C. is available to provide debt relief services to businesses in Greenwood Village and throughout Colorado.

Obtaining Credit During Chapter 11

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The debtor’s ability to obtain credit and financing is key to ensuring the continued operation of the business. In general, a Chapter 11 debtor may not use lines of credit extended before the Chapter 11 petition was filed (prepetition) and must instead rely on funds generated from post-petition operations and new extensions of credit to finance post-petition business operations. A bankruptcy attorney at Jon B. Clarke, P.C. in Greenwood Village, Colorodo, can work with a Chapter 11 debtor to pursue financing while the bankruptcy case is pending.

Cash Collateral

The use of “cash collateral” by Chapter 11 debtors and post-petition extensions of credit or sales on credit to debtors are subject to the limitations and requirements prescribed in the Bankruptcy Code. Cash collateral includes cash, negotiable instruments, documents of title, securities, deposit accounts, and other cash equivalents whenever acquired in which the debtor and an entity other than the debtor have an interest. Cash collateral also includes the cash derived from other collateral, including proceeds, products, offspring, rents, or profits. 11 USCA § 522.

The Use, Sale and Lease of Encumbered Property

In general, property and cash of the debtor is encumbered by liens or security interests at the time the Chapter 11 petition is filed. In bankruptcy, property acquired after the petition was filed (post-petition) is generally protected from prepetition liens and clauses in prepetition contracts which create a security interest in all of the debtor’s property owned at the time of the contract or thereafter acquired (after-acquired property clauses) are not recognized. 11 USCA § 552(a). However, a creditor’s claim does extend to the accounts receivable, “proceeds, product, offspring, rents, or profits” from the sale or disposition of prepetition collateral or inventory, 11 USCA § 522(b), and there may be restrictions or conditions on the use of such property.

The Use of Encumbered Property that is NOT “Cash Collateral”

Whether a debtor may and the conditions under which a debtor may use encumbered property that is not cash collateral depends on whether the debtor’s use of the property is in the ordinary course of business.

  • In the ordinary course of business. Unless a request for “adequate protection” has been made, a trustee or debtor in possession (DIP) may use, sell, or lease encumbered property in the ordinary course of business as long as the property is not “cash collateral.” 11 USCA § 363(c)(1).
  • NOT in the ordinary course of business. Before a DIP or trustee may use, sell, or lease encumbered property that is not cash collateral in a manner that is not in the ordinary course of business, a notice and hearing to ensure “adequate protection” of the creditor is required. 11 USCA § 363(b).

The Use of Encumbered Property that is “Cash Collateral”

When “cash collateral” is used or spent, the entities that have a security interest in the property (secured creditors, lien creditors) are entitled to receive additional protection. A debtor may not use, sell, or lease “cash collateral” unless there is:

Consent by the secured party. A lien creditor may consent to a debtor’s use of the property, typically in exchange for:

  • A lien on post-petition property / inventory and receivables and
  • An administrative expense priority. 11 USCA § 363(c)(2)(A).

Court authorization. If the court determines after notice and a hearing that the collateral is adequately protected, a debtor may use the property as authorized in the court’s order. 11 USCA § 363(c)(2)(B).

  • In most Chapter 11 cases, the court’s authorization is a consent order approving an agreement between a creditor and a debtor
  • Prior the court’s authorization, the debtor must segregate and account for all cash collateral. 11 USCA § 363(c)(4).

Postpetition Extensions of Credit

Debtor in possession financing, also called “DIP financing” or “section 364 financing,” is often the primary source of post-petition funding available to Chapter 11 debtors. Under section 364 of the Bankruptcy Code, a creditor (lender) may extend credit and make sales on credit to a debtor in exchange for an administrative expense priority, special priority, or a senior lien on property already subject to a lien. 11 USCA § 364.

Unsecured Credit

Whether a debtor may and the conditions under which a creditor may extend post-petition unsecured credit to a debtor depends on whether the extension of credit is in the ordinary course of business.

  • In the ordinary course of business. In general, a creditor who has authority to operate the debtor’s business may extend unsecured credit to a debtor in the ordinary course of business in exchange for an administrative expense priority under section 503(b)(1) for the obligations incurred. 11 USCA § 364(a).
  • NOT in the ordinary course of business. A court may authorize a creditor after notice and a hearing to extend credit that is not in the ordinary course of business to a debtor in exchange for an administrative expense priority under section 503(b)(1) for the obligations incurred. 11 USCA § 364(b).

Secured Credit

If a debtor is unable to obtain unsecured credit, the court may authorize a creditor to extend post-petition credit in exchange for special priority or a senior lien.

  • Priority or secured credit. If a trustee or debtor in possession is unable to obtain unsecured credit because creditors are unwilling to extend credit in exchange for an administrative expense priority, a court may authorize a creditor after notice and a hearing to extend credit in exchange for special priority or a lien that does not interfere with existing liens. 11 USCA § 364(c).
  • Priming secured credit. If a trustee or debtor in possession is otherwise unable to obtain credit, the court may authorize a creditor after notice and a hearing to extend credit in exchange for a senior lien on property already subject to a lien (in other words, the court will authorize a post-petition lien that primes a prepetition lien). The authorization of priming secured credit is a “last resort,” uncommon, and only allowed if the prepetition lienholders whose liens will be displaced are adequately protected. 11 USCA § 364(d).

Speak to a Bankruptcy Lawyer

If you have questions about obtaining financing while a Chapter 11 bankruptcy case is pending, contact a lawyer at Jon B. Clarke, P.C. in Greenwood Village, Colorodo, to schedule a consultation.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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