What is adequate protection?
Adequate protection is the right of a secured creditor to receive protection against the decreased value of their interest in the property while the debtor is using the property. When a creditor is secured by a piece of property we generally assume the property is losing value as time goes on. If the loan is for more money than the property is worth then the creditor is entitled to at least as much money each month as the property is depreciating by each month. This protection payment is supposed to make sure the creditor is not owed more money than the depreciation amount each month.
In a Chapter 13 bankruptcy, the debtor retains possession and use of the property and the creditor holds the right to adequate protection of its collateral before the Chapter 13 case is confirmed. If the creditor is not adequately protected it may file a motion for relief from the automatic stay and request the debtor to provide protection payments or allow it to repossess the property.
One of the easiest examples to illustrate adequate protection is when a car loan lender makes a demand for adequate protection because the car is depreciating in value and the lender has not yet been paid through the Chapter 13 plan. The lender can request periodic cash payments, an additional lien, or other relief as agreed by the parties.
Debtor owns a vehicle worth $4000 and has a loan with Bank for $4000. The debtor’s Chapter 13 plan proposes a $150 per month payment to the bankruptcy trustee for 60 months with $50 to be paid to Bank (the remaining $100 per month is paid to attorney’s fees, trustee fees, and priority debt). Let’s say that the vehicle depreciates $700 per year or $58 per month.
Simple Analysis without interest and fees:
The Bank could argue that it is not adequately protected because
It is unclear when payments to the Bank will begin—there is a delay between the filing of the petition and payout of the plan, typically there are 2-3 months where Bank receives nothing while waiting for the court to confirm the plan. During this time, the vehicle is depreciating $58 each month, which hurts or impairs the creditor’s interest in the vehicle.
- Its claim amount will not be paid in full through the plan–$50*60months=$3000 not $4000 – This is an objection to confirmation argument but may be lumped together in a motion for adequate protection.
The Bank may then propose that the debtor make ongoing payments during the 2-3 months before the case is confirmed or increase the monthly payment amount, for example up to $60 per month to cover the $58 depreciation cost.
Although this will take care of an adequate protection claim the creditor may still have another objection about the rate at which the claim is being paid since it does not seem to enough to pay the debt over the lifetime of the plan. In most cases the payment to the bank will increase once the attorney fees are paid in the case. Let’s assume that once the attorney fees are paid in month 30 that the payments will increase to cover the vehicle over the remaining months of the plan.
This issue commonly arises at the very beginning of a case and later if the debtor fails to make necessary plan payments. As payments are missed the vehicle drops in value below what is owed on it and the issue arises, causing a motion for relief due to lack of adequate protection to be filed. Most motions based on lack of adequate protection are resolved by agreed order between the creditor and the debtor. It is also common practice to include actions the creditor may take if the debtor fails to maintain adequate protection.
Creditors and debtors both deserve to have their property rights respected when an individual files for bankruptcy. By making adequate protection payments the debtor can keep the vehicle and the creditor will have the value of their interest protected. In most cases when planning a case the attorney for the debtor will divide the amount owed to the creditor by 60 to make sure the payments are enough to cover an objection filed by the creditor.
If you have any questions about bankruptcy please feel free to contact our office. One of our bankruptcy attorneys will be happy to go over your questions and help you determine your options.