Adequate Protection

The Fifth Amendment to the United States Constitution provides: “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

Derived from the concept of the Fifth Amendment protection of property rights is the idea of “adequate protection” per Section 361 of the United States Bankruptcy Code, or Code. If a creditor’s property is not adequately protected, that creditor may have certain rights to lift the stay.

Adequate Protection

The Code provides that a secured creditor to a bankruptcy must have adequate protection of its lien throughout the term of the bankruptcy. Specifically, section 361 of the Code provides: “An under secured creditor may be entitled to adequate protection to ensure against the decline in value of its collateral. Where there is the possibility of a diminution of a creditor’s collateral interest, a debtor may be required to provide the creditor with adequate protection, such as periodic cash payments.” If the lien is diminishing or reasonably believed to be diminishing, a secured creditor can utilize certain remedies.

Remedies for Adequate Protection

After filing for bankruptcy that triggers the automatic stay, a secured creditor can petition the court for adequate protection. An example is when a consumer purchases a car. The purchase consists of a down payment plus dealer financing through monthly payments to the dealer. To collateralize the loan, the dealer has a lien on the car until the all the financing is paid. A short time later, the consumer files for Chapter 7 or Chapter 13 bankruptcy protection. As such, the dealer is stayed from collecting car payments. At the same time, the dealer is concerned about the depreciating value of the car because the dealer’s accounts receivables have not changed but the car’s value continues to diminish.

The Bankruptcy Court overseeing the case has options at its disposal with regard to preserving adequate protection. It can demand periodic payment from the debtor to ensure that the lien is protected; it can require the debtor to pay interest payments on the property; or it can require the debtor to provide other collateral to protect the creditor’s lien. A Bankruptcy Court has discretion in determining the proper adequate protection and will base its ruling on the specific circumstances.

Drowning in debt? Could you use a fresh start? Bankruptcy may be right for you. Contact the consumer bankruptcy law firm of Melanie Tavare, a Bay-area debt-relief firm.