Adequate Protection Explained:

Adequate protection payments are made to a secured creditor to provide protection for the creditor’s depreciating collateral.  In a Chapter 13 bankruptcy, a debtor is granted an automatic stay upon filing of the bankruptcy, meaning creditors cannot pursue usual modes of collection if payments are not made on time.  While Chapter 13 filers are required to start making payments to the Trustee upon filing their proposed plan, the Trustee cannot distribute payments to creditors until the plan in confirmed.  Since it can take many months for a Chapter 13 plan to be confirmed, secured creditors would then be stuck in limbo while their collateral depreciates in value before they receive any money from the bankruptcy.  In comes “adequate protection.”

Creditors have rights under Chapter 13.  Adequate protection payments give the court time to review the proposed repayment plan without bringing harm to the creditor.  The secured creditor receives something on its loan while waiting for a feasible plan to be confirmed.  Further, if a plan is never confirmed and the case is dismissed, the creditor at least does not wholly lose out on months’ worth of full payments.

If a debtor does not include adequate protection payments in his or her plan, some bankruptcy courts will not confirm the plan.  Creditors also have the option to file a motion to request adequate protection if the plan has left it out.  Once a Chapter 13 plan is confirmed, adequate protection payments stop as the usual plan payments will begin.

Adequate Protection Defined:

Adequate protection is defined in Section 361 of the Bankruptcy Code.  Under Section 361, a debtor must: (1) make a cash payment or payments to the extent the stay results in a decrease in the value of its collateral; or (2) provide the creditor an additional or replacement lien, such as a replacement lien on post-petition accounts receivable.  The court can also grant other relief that will result in the “realization” of the “indubitable equivalent” of the creditor’s interest in its collateral to the extent options (1) or (2) are insufficient to provide the creditor with adequate protection.

Section 1326 of the Bankruptcy Code provides that “…the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount…that provides adequate protection directly to a creditor holding an allowed claim secured by personal property to the extent the claim is attributable to the purchase of such property by the debtor for that portion of the obligation that becomes due after the order for relief, reducing the payments under subparagraph (A) by the amount so paid and providing the trustee with evidence of such payment, including the amount and date of payment.”

Debt that is Subject to Adequate Protection:

When determining adequate protection payments, it is first necessary to determine whether the creditor is under-secured or over-secured.  Creditors who are under-secured, meaning the amount of the debt exceeds the value of the collateral, are entitled to protection as to the value of the collateral.  Creditors who are over-secured, meaning the amount of the debt is less than the value of the collateral, are entitled to protection as to the full value of their claim.

Perfected security interests, claims with a right of setoff, guarantors, and co-owners may also be entitled to adequate protection.  Unsecured claims are not entitled to adequate protection.

Determining the Amount of Adequate Protection:

Each bankruptcy court handles adequate protection differently.  The amount of the payment generally depends on the value of the collateral, the amount of the original monthly payment, and the local rules in that district.  Usually, monthly adequate protection payments will be 1% of the secured claim.

Typically, adequate protection temporarily reduces the amount of the monthly payment until the Chapter 13 plan is confirmed by the court.  This is part of the balancing of interests between secured creditors and debtors.

Louisiana Creditor Bankruptcy Attorneys:

We are a Gretna law firm that has served the New Orleans area since 1980.  Our experienced creditor bankruptcy lawyers are well versed at handling all types of creditors’ rights matters including bankruptcy and adequate protection.  We take pride in offering an effective and efficient experience.  Call us today for a free consultation and find out why so many of our clients come back to us.