What Is Adequate Protection in Bankruptcy?

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The term "adequate protection" in bankruptcy has a unique legal definition separate from what we normally understand adequate protection to mean.  Adequate protection is a term used specifically for Chapter 11 bankruptcy cases.  Adequate protection refers to the protection offered to creditors of a failing business to ensure payment to the creditor through the use of business assets essentially as collateral.

Understanding Chapter 11 Bankruptcy and Adequate Protection

A Chapter 11 bankruptcy is designed for businesses who hope to save their businesses through reorganization of finances.  Businesses seeking to take advantage of protection under Chapter 11 do not want to liquidate all their assets and do not want to abandon their businesses and discharge all debts.  Businesses seeking Chapter 11 bankruptcy can use their assets to insure to creditors that there business still has value.  Once a business files for bankruptcy, collectors may not enforce collections efforts such as foreclosure on a mortgage.  The only protection a creditor has is in the adequate protection of a business. The business assets become items which creditors have a legal claim to take in the event of business failure.  Creditors must be given adequate protection that the assets will not be sold or destroyed by the business owner.  To protect creditors’ interests, a business owner who files for Chapter 11 bankruptcy cannot sell, lease, or otherwise dispose of business assets. If the Chapter 11 bankruptcy fails, the creditors know that the business assets will be sold and the money made from the sale will go to pay off the business debts. (See also how creditors get personal assets in Chapter 11 business bankruptcy).

How Long Does Adequate Protection Stay in Effect?

Once a business is viable again, it will be released from the bankruptcy rules, including the adequate protection rule.  Once the business is no longer under the protection of bankruptcy, creditors can collect under all the usual methods including foreclosure, and the adequate protection is no longer in effect.  If a business does not have adequate protection, or does not have significant business assets to assure creditors have something of value in the business, the bankruptcy court can allow the creditors to pursue all legally allowable methods of collection, which essentially erases the protection of bankruptcy for the business.  It is in the best interest of the business owner to have adequate protection which allows the protection of bankruptcy to continue and allows the business to reorganize in order to become profitable again.

Do You Need Legal Help?

If you have a business and are considering bankruptcy, it is essential that you speak to an experienced bankruptcy attorney to assess the different options available to you in filing for bankruptcy and in understanding how your business assets play a role in that decision.  Filing for Chapter 11 bankruptcy, without adequate protection, could backfire and you could end up without the protection you need to save your business.  The time and money you spend analyzing your options with a bankruptcy attorney could very well be the key factor in saving your business.