What are Adequate Protection Payments and When are Adequate Payments Required?

By Ryan C. Wood

Adequate protection payments are paid to a secured creditor prior to the confirmation of a Chapter 13 plan or Chapter 11 plan or reorganization. As the name implies, the payment is to adequately protect the secured creditor’s interest your collateral. The most common adequate protection payments are made to creditors that use your car as collateral. There is a period of time between the filing of your Chapter 13 bankruptcy case to the confirmation or approval of your plan that the loan holder still needs to be paid. This period of time could last anywhere from two months to a year or more depending on your case. Your bankruptcy lawyer will be able to explain why there is delay in confirmation/approval or when confirmation/approval is anticipated. You are still driving your car during this period of time and therefore your car is depreciating in value. The adequate protection payments are to protect your secured creditor’s interest in the collateral during the time between when you first filed your Chapter 13 bankruptcy case to the confirmation of your plan. Once your Chapter 13 plan is confirmed your creditor will be paid based on the Chapter 13 plan filed.

Another use of the adequate protection payments are when you are behind on post-petition mortgage payments. Your Chapter 13 plan should pay back of your pre-petition mortgage arrears. You are responsible for making your regular monthly mortgage payments going forward. If you are behind on the post-petition mortgage payments your lender may file a motion to lift the automatic stay so they can proceed with foreclosure procedures on your house. Your bankruptcy lawyer should be able to set up some sort of payment plan with your mortgage lender and negotiate an adequate protection payment that is satisfactory to both parties. Your mortgage lender may then file an Adequate Protection Order with the court. This is an order signed by the court that provides the payment agreement you entered into with the mortgage lender. Failure to abide by the terms of the order may mean that your mortgage lender may continue with foreclosure proceedings.

Pursuant to 11 U.S.C. §1326, an adequate protection payment will need to be paid within 30 days of the filing of the bankruptcy petition or an order for relief. The order of relief may be granted once the secured creditor files a motion to lift the automatic stay so they can proceed to repossess a vehicle or foreclose on a home as indicated in the paragraph above. To avoid this result the person filing for bankruptcy would need to provide some sort of protection to the secured creditor in the form of payment for the asset.

How do you pay this adequate protection payment? You make the adequate protection payment to the Chapter 13 trustee as part of your Chapter 13 plan or directly to the creditor depending on your case. If you make the payment to the trustee, the trustee will then make the proper disbursements based on the plan filed with the court. Before the secured creditor could get any funds from the trustee they must first file a proof of claim with the court first. If a proof of claim is not filed they will not receive any of the disbursements. Your bankruptcy attorney should view the proof of claim for accuracy. Whether the trustee distributes the payments to the creditor before the plan is confirmed or after depends on the jurisdiction in which you filed your case. Some jurisdictions allow the payments to go to the secured creditor before the plan is confirmed, some jurisdictions allow the payments to go to the secured creditor if there is a direct order to that effect, and some jurisdictions make the secured creditor wait until the plan is confirmed before they receive their payments.