“Don’t worry about extending credit to the debtor during Chapter 11. You’ll have an administrative claim.”

True but not fully. Claims that arise during the bankruptcy case from goods or service received by the debtor during bankruptcy have an administrative claim. But it is the rule that a lender to the debtor will require a super priority administrative claim as a condition to making loans to the debtor (called “DIP” loans). This means that, if the bank is not paid in full from its collateral, the bank’s administrative claim is senior to other administrative claims, such as those of a vendor.

Professionals retained in the case typically have a “carve out” so that their administrative claims become senior, even to those of the bank, so the super priority administrative claim given to the bank will affect professionals less. Further, professionals are paid on a monthly basis, typically 80% of their invoice amount with the balance of 20% paid every 120 days. And even when a debtor is struggling with cash flow issues, professionals seem to get paid anyway. Finally, recognize that there is never a guarantee that administrative claims are paid. There have been many cases where the debtor’s estate becomes administratively insolvent. Two that come to mind are the retailers Toys R Us and Sears. It happens more often than is commonly known.

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