When a debtor files for bankruptcy, the automatic stay stops the creditor from foreclosing on the collateral. But the clock keeps running. Property can deteriorate, values can drop, and insurance can lapse. A debtor who is not making payments and not maintaining the collateral can cause the value of a secured creditor’s security to erode significantly over the life of a bankruptcy case.
Adequate protection is the remedy for this.
What Adequate Protection Is
The Bankruptcy Code requires that a secured creditor’s interest in collateral be adequately protected during the period the automatic stay is in effect. If the collateral is declining in value and the debtor is not making payments, the creditor’s security interest is being eroded.
There are three ways the court can provide adequate protection to a secured creditor:
- Cash payments to the creditor, typically equal to the monthly interest on the secured claim, to compensate for the value the creditor would have received if it had been able to foreclose and reinvest.
- An additional or replacement lien on other property of the debtor, to substitute for the security that is being eroded.
- Some other relief that the court determines gives the creditor the practical equivalent of their interest in the collateral.
Cash payments are the most common form of adequate protection we seek for clients with real estate collateral.
When We File for Adequate Protection
We evaluate the adequacy of protection in every bankruptcy case involving a secured-creditor client. The situations where it matters most include:
- Commercial properties that are vacant, generating no income, and deteriorating while the bankruptcy case is pending.
- Properties where the total debt is close to the property’s value, so any decline in value will erode the creditor’s equity cushion.
- Cases where the debtor is not maintaining insurance on the property.
- Chapter 11 cases that appear likely to last a long time, often months or years, during which the creditor would otherwise receive nothing.
Adequate Protection and Stay Relief
Adequate protection and a motion for relief from the automatic stay are related but different tools, and we sometimes use them together.
Stay relief asks the court to let the creditor proceed with foreclosure immediately. Adequate protection asks the court to require the debtor to compensate the creditor while the stay remains in effect. In situations where stay relief is uncertain, for example where the debtor has just filed and the court may want to give the reorganization a chance, filing for adequate protection at the same time gives the creditor a meaningful remedy while the stay relief question is being decided.
If you have a secured claim in a pending bankruptcy case and you are not receiving payments, contact us. You may have rights worth exercising.
In this section: Bankrupt Debtors · Automatic Stay Relief
Frequently Asked Questions
How do we show that the collateral is declining in value?
We typically support an adequate protection motion with evidence of the property's current market value, either an appraisal or a broker's price opinion, compared to the outstanding debt. If the equity cushion is shrinking because values are falling or because the property is not being maintained, that evidence supports the motion. In commercial cases we may also document deferred maintenance, vacancy, or deteriorating income.
Can adequate protection payments be ordered even before stay relief is resolved?
Yes. Adequate protection and stay relief are separate remedies that can be pursued simultaneously or independently. A court can order the debtor to make adequate protection payments as interim relief while stay relief is being litigated. This is especially useful in long-running Chapter 11 cases where the stay relief process takes time.
What happens if the debtor fails to make the court-ordered adequate protection payments?
Failure to comply with a court-ordered adequate protection obligation is a default under the order and gives the creditor grounds to seek immediate stay relief. A debtor who stops making adequate protection payments is typically treated by the court as having failed to comply with its obligations, which strengthens the creditor's stay relief motion considerably.
Is adequate protection available in Chapter 7?
Adequate protection is most commonly sought in Chapter 11 and Chapter 13 cases, where the case lasts long enough for collateral value to erode significantly. In a Chapter 7 case, the stay typically terminates relatively quickly, either because the property is surrendered, the debtor reaffirms, or the case closes. For commercial Chapter 7 cases that drag on, or when the trustee is administering valuable real property, adequate protection can be relevant.