Chile: A Bankruptcy/Restructuring Overview
Financing Under Financial Protection: The Chilean Tool That the Market Has Yet to Discover
When a Chilean company enters a judicial reorganisation procedure, a relief period known as the financial protection period (FPP) begins. This period – which runs for 60 business days from the reorganisation resolution until the creditors’ meeting that votes on the judicial reorganisation agreement, and may be extended up to 180 days with creditor support – shields the debtor company from collections, executions and early contract terminations, while a court-appointed overseer supervises its operations.
Article 74
During the FPP, Chilean law offers one of its least known, yet most powerful, tools: the ability of a distressed company to obtain fresh financing with exceptional legal backing. Article 74 of Law No 20,720 allows the debtor company to contract loans or other financing operations to fund its operations during the FPP, provided the financing does not exceed 20% of its liabilities as certified by an independent auditor. If the required amount exceeds that threshold, or if the financier is a related party, the law requires authorisation from creditors representing more than 30% of the debtor’s liabilities, excluding related parties. The mechanism is designed to provide liquidity to viable companies without handing control of the process to a single actor.
What is distinctive about this financing is not only its availability but the legal certainty that the law grants to those who provide it. Credits contracted under Article 74 do not enter the list of credits in the process and are paid on the originally agreed dates, regardless of what the reorganisation agreement provides. Furthermore, if, despite everything, the company ends up in bankruptcy (liquidation) – for any reason and at any time until full payment of the credit – the law grants that financing super-priority within the first class of credits under Article 2472 of the Civil Code. In practice, this means that the FPP financier is paid before labour credits, tax credits and even those secured by pledge or mortgage.
This design evokes – albeit in a more limited form – the debtor-in-possession (DIP) financing of Chapter 11 of the US Bankruptcy Code, whose objective is the same: to attract fresh capital to crisis-stricken companies by offering payment certainty. The difference lies in the degree of development. While the North American system has decades of judicial practice, sophisticated financing structures and a specialised market, the Chilean framework is only beginning to explore its potential. The reform introduced by Law No 21,563 in 2023 reinforced this super-priority, but was not enough, by itself, to bring the instrument into regular market use.
It is worth highlighting an aspect that often goes overlooked: the super-priority under Article 74 arises by operation of law, not from any agreement between the parties. It requires no specific guarantees, does not depend on prior judicial authorisation for each operation within the legal threshold, and cannot be altered or waived by private agreement, not even within the reorganisation agreement itself. That automaticity reduces much of the uncertainty that normally increases the cost of credit for distressed companies, because the financier does not depend on the future consent of other creditors to secure its payment position; its priority is fixed from the moment the credit is granted and certified in accordance with law.
Why, then, does a tool with such solid legal backing remain marginal in the Chilean market? The answer lies more in banking regulation than in bankruptcy law. Commercial banks are required to set aside provisions covering more than 90% of any loan extended to a company in reorganisation, making such financing unattractive for traditional banking. Consequently, financing during the FPP has been provided mainly by private investment funds, willing to assume the risk in exchange for the returns and statutory payment position that the law ensures them.
Future Outlook
The level of insolvency activity in Chile shows a market that remains active, despite being limited in terms of volume of large reorganisations: during 2025, 12,333 insolvency proceedings were initiated in the country, according to the annual report of the Superintendency of Insolvency and Re-Entrepreneurship (Superir, Statistical Report of Insolvency Proceedings 2025). That universe, composed mainly of individuals and micro and small businesses, as well as liquidation bankruptcy proceedings, contrasts with the more limited number of large judicial reorganisations, which is precisely the segment where financing with super-priority makes the most economic sense.
The opportunity, then, is available not only for distressed companies but for the financiers themselves. An instrument with a legally shielded payment position, which does not depend on the negotiation of the reorganisation agreement or additional guarantees, should be attractive to investors specialised in financial stress situations. The gap between the instrument’s legal potential and its actual use suggests not a failure of legal design but a lack of market familiarity with the instrument.
As investment funds and law firms gain experience in structuring these operations, and as courts continue to interpret and apply Article 74 in concrete cases, it is expected that financing in bankruptcy financial protection will cease to be a technical curiosity and become a regular tool for rescuing viable companies in Chile. The law is already ready for that scenario; the market needs to catch up.