Debtor-in-possession loans in Chapter 11 bankruptcy

American Suzuki Motor Corp recently received bankruptcy court approval to borrow money from its parent corporation, Suzuki Motor Corp.

Approval of the $45 million loan at a 3 percent interest rate was necessary for the bankrupt corporation, which plans to shut down some dealerships while it works to increase boat and motorcycle sales.

Whether you are a lender or a debtor going through bankruptcy, debtor-in-possession (DIP) loans can be beneficial to you. DIP loans are generally much more secure than loans filed prior to bankruptcy. This is because they are senior to pre-petition debt. Thus, a lender may offer a DIP loan in order to maintain, or prevent deterioration of, his or her position in the bankruptcy.

In American Suzuki Motor Corp.’s case, the federal bankruptcy judge gave American Suzuki only interim authority to borrow money, but it will likely receive full authority in the next few weeks. That authority may allow the corporation to borrow up to $100 million.

The corporation went into bankruptcy in order to avoid certain costs and losses, including the cost of new federal regulations. Furthermore, only 31 percent of car dealers in American Suzuki Motor Corp. are able to sell more than five cars each month.

If your company is considering bankruptcy, an experienced business bankruptcy lawyer can help you discuss the implications of bankruptcy on your company and the options available for you to move successfully through the bankruptcy, including DIP loans.

Learn more about business bankruptcy by visiting our pages on Chapter 11 bankruptcy.

Source: Bloomberg Businessweek, “American Suzuki wins approval of loan for dealer shutdown,” Steven Church, Nov. 7, 2012