My city of Detroit is in bankruptcy, yet, is on the verge of?borrowing (another) $350 million dollars. ?How can you borrow money when you are in bankruptcy?
Detroit is in Chapter 9 bankruptcy. ?Companies, like Detroit?s General Motors, file Chapter 11 bankruptcies to reorganize.
Individuals can file Chapter 7 bankruptcy to wipe out debts, or Chapter 13 payment plans.
Debtors, the company or person who files bankruptcy, can borrow money any time they can get someone to lend it to them, after filing Chapter 7 bankruptcy.
Debtor-In-Possession Financing
A debtor in possession?is, in the bankruptcy world, the entity which files a Chapter 11 ? be it a company or an individual.
The person, or company, who files Chapter 11 acts as its own trustee. As such, the debtor has the legal duty to operate for the benefit of creditors.
When the debtor in possession (or D.I.P.), borrows money AFTER filing bankruptcy, it is called DIP financing.
There have not been a lot of Chapter 9 bankruptcies filed, so there is no precedent for what Detroit is trying to do.
Borrowing money while in bankruptcy requires court approval in Chapter 11 cases, as well as Chapter 13 cases, if over a certain amount of money, and, in Chapter 9 bankruptcy cases.
Why would someone lend money to a city, company, or person still in the middle of a bankruptcy?
New Creditors Want To Get Paid
They sure as heck want to get repaid. ?In most DIP financing, the Court gives the lender a first lien on some or all of the assets of the debtor. ?The lender can even get a lien superior to a creditor that had a lien on the asset before the bankruptcy was filed. According to the Reuters article:
The city plans to use about $250 million to terminate a complicated swaps deal related to previous bonds issued to finance pension debt, said Bill Nowling, press secretary for Detroit?s state-appointed emergency manager, Kevyn Orr.
About $100 million would ?provide the city with adequate liquidity throughout the restructuring case to start reinvesting in Detroit today,? Nowling said in an e-mail to Reuters. It would be a line of credit the city could draw from, but it may not use all of it, he said.
Casino revenue was pledged to cover some debt, as the city?s credit continuously declined over time. ?The city?s emergency manager wants to retire that debt and free up some operating cash, as it would be called if the city were a business. ? Its complicated.
Every person or company in Chapter 11 tells the bankruptcy judge that they must have the DIP financing, or they will go under. ?Lots of times, the other creditors agree to the new financing, because, they realize, the business WILL go under without new money.
We will have to see what the creditors of the city of Detroit think when the time comes.
Michigan student loan and bankruptcy attorney certified in Consumer Bankruptcy by the American Board of Certification, also handles student loans. Michigan State Chair for the National Association of Consumer Bankruptcy Attorneys, over 170 members, Martindale-Hubble av rated (highest rating), lecturer for National Business Institute and NACBA in Michigan, Illinois, California, Ohio and Louisiana.
Last modified: September 9, 2013
Source: http://www.bankruptcylawnetwork.com/in-bankruptcy-but-borrowing-money/
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