What is “adequate protection” in a Chapter 11 bankruptcy?

In a Chapter 11 bankruptcy, “adequate protection” is a mechanism to protect unsecured creditors from the debtor obtaining new financing from secured creditors. It allows the debtor to continue making payments on their secured debt while also allowing them to use the cash collateral to pay for ongoing business expenses. Adequate protection allows secured creditors to receive their secured debt payments while also allowing unsecured creditors to receive a portion of those payments as well. This is done by either setting up a cash collateral account that the debtor will make payments to or by allowing the debtor to use the secured debt payments to pay for essential business expenses. Either way, the unsecured creditors are guaranteed a portion of the secured debt payments to help satisfy their claim against the debtor. When a debtor obtains new financing through secured creditors during the bankruptcy process, the court may grant adequate protection to unsecured creditors. This is done by either allowing the unsecured creditors to have access to additional funds that are collateralized by the debtor or by setting up a separate escrow account that holds funds from secured debt payments that can be used to pay the unsecured creditors. Adequate protection is an important consideration in Chapter 11 bankruptcies and is one of the primary ways unsecured creditors can protect themselves from the potential for loss. By providing a mechanism for unsecured creditors to receive a portion of the secured debt payments, it ensures that all creditors are able to receive a portion of what they are due in the bankruptcy process.

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What is “adequate protection” in a Chapter 11 bankruptcy?

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