Postpetition Lending under Section 364: Current Issues - Incentives to Lenders to Provide Financing to Borrowers Who Are the Subject of Bankruptcy Cases

David G. Epstein, University of Richmond


A bankruptcy debtor is not viewed by most lenders as a desirable customer. Most lenders arc understandably reluctant to extend credit to such a borrower. This reluctance compounds the difficulties of a bankruptcy debtor. Without new financing, the cash needs of a debtor often will cause the debtor's assets to be liquidated, thereby foreclosing any hope of reorganization and defeating the rehabilitative purposes of the Bankruptcy Code. To counter the understandable reluctance of financial institutions to lend to bankruptcy debtors, section 364 of the Bankruptcy Code provides incentives to lenders to provide financing to borrowers who are the subject of bankruptcy cases. Section 364 enables a debtor to obtain credit by granting a prospective lender a variety of different incentives, some of which are not available on a nonconsensual basis outside of the bankruptcy context.