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Adequate Protection for Undersecured Creditors: The Basics

One of the reasons people file for Bankruptcy is to enjoy the protection of the automatic stay. What is the automatic stay? The automatic stay prevents creditors from taking any actions to collect from the debtor. The automatic stay is often problematic for creditors, especially secured creditors facing a debtor in Chapter 11 or Chapter 13 Bankruptcy, who are concerned the value of the collateral will decrease over time while the debtor attempts to complete their payment plan. Fortunately, the Bankruptcy Code allows undersecured parties an opportunity to lift the stay "for cause including the lack of adequate protection" after providing notice and attending a hearing. 11 U.S.C. § 362 (d)(1).

Adequate Protection is not explicitly defined in the Bankruptcy Code, but is often found to be lacking when the value of the debtor's encumbered asset(s) is less than the secured creditors claim. However, even when this is the case, the Code lists three ways that debtors can still provide adequate protection to undersecured creditors and prevent the automatic stay from being lifted: (1) make periodic cash payments to the undersecured creditor; (2) grant an additional/replacement lien to the extent that the stay causes the value of the original collateral to decrease; or (3) grant "such other relief" that will allow the creditor to realize the "indubitable equivalent" of its interest. 11 U.S.C. § 361 (1-3). If none of these are met the Court may grant a stay after the hearing has taken place and the debtor has the burden of proof showing that one of these options for providing adequate protection has occurred and that it is enough to protect the secured creditor's bargained for interest. 11 U.S.C. §362 (g).

Here, at Taylor Dunham and Rodriguez, we are proud of our experience in enforcing creditors' rights. If you are a creditor in need of legal assistance do not hesitate to contact Taylor Dunham and Rodriguez today.

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