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

Adequate protection is a legal term found in Chapter 11 Bankruptcy Law in Virginia. It is a measure of safeguards to protect the interests of creditors and other stakeholders of the bankrupt company. Specifically, adequate protection is provided to creditors when their interests are placed ahead of those of other claimants and secured when the bankruptcy court approves a payment plan for the creditor. Adequate protection is a requirement of Chapter 11 bankruptcy proceedings and is achieved when the value of a creditor’s assets is kept whole, or made whole, while the debtor is reorganizing. To do this, the debtor must provide the creditors with sufficient cash or other forms of collateral to function as a safety net. This ensures that the debtor’s creditors are not left with no recourse when the debtor is unable to make full payment on debts. Adequate protection is illustrated in practice when a company with assets that have value, such as real estate or inventory, is unable to pay its creditors and is forced to file for bankruptcy. The bankruptcy court may allow the company to pay creditors by providing them with periodic payments over the course of the bankruptcy process. This is called “adequate protection” and the payments are designed to maintain the value of the assets that the creditors are entitled to collect.

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