What is adequate protection in Chapter 13 Bankruptcy?
Adequate protection in chapter 13 bankruptcy is a complicated concept and properly understanding it can ensure your chapter 13 bankruptcy proceeds smoothly. Adequate protection payments are payments made to a secured creditor to provide protection for the creditor’s depreciating collateral. This somewhat amorphous concept comes into play in chapter 13 and chapter 11 bankruptcies.
In a chapter 13 bankruptcy, the debtor proposes a plan for repayment of debts. Upon filing the chapter 13 case, the clerk of the court will schedule a date for a confirmation hearing, which in Maryland is typically set for approximately 90 days after the case is filed. Confirmation can be postponed months beyond the 90 days for many reasons. If the chapter 13 plan meets the requirements of the Bankruptcy Code, the court will confirm the plan at the confirmation hearing by entering a confirmation order. Before the chapter 13 plan is confirmed, the debtor is required to make chapter 13 plan payments to the trustee, who collects the chapter 13 plan payments but cannot distribute the payments to creditors until the plan is confirmed.
Certain kinds of secured loans can be crammed-down, such as car loans and home loans in certain circumstances. A cram-down of a secured debt for a car means that instead of paying the entire amount owed on a car loan, a debtor may be able to pay only the value of the car. A cram-down can also lower interest rates and term-out car loans for a longer period of time. By way of example, say a debtor has a car that’s worth $10,000.00 but owes $20,000.00. Also assume that the interest rate is high at 15%. Finally, assume that the car note matures 2 years into a 5-year chapter 13 plan. If the car is able to be crammed-down, instead of paying $20,000.00, the debtor will only pay $10,000.00 for the car. Also, in Maryland, the interest rate can typically be lowered to prime + 1% (currently 6.5%). The car note can also be termed out over the course of 60 months instead of 24 months. A cram-down can result in a significant benefit to a debtor.
If a secured car loan is crammed down, instead of making payments directly to the creditor, the debtor incorporates the crammed-down payment into the chapter 13 plan payment made to the chapter 13 trustee. As explained above, creditors do not receive any distributions from the chapter 13 trustee until the court confirms the chapter 13 plan. This means that until the plan is confirmed, the auto finance company will not receive any payments. This is when adequate protection in chapter 13 bankruptcy comes into play. Before the chapter 13 plan is confirmed, the auto finance company’s collateral – the car – is depreciating in value before it has been paid anything. In order to protect the its collateral, the Bankruptcy Code requires adequate protection payments before confirmation.
Adequate Protection Statutes
Adequate protection in chapter 13 bankruptcy of the kind this article discusses is governed by 11 U.S.C. § 1326(a)(1)(c), which provides that:
“…[T]he debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount…that provides adequate protection directly to a creditor holding an allowed claim secured by personal property to the extent the claim is attributable to the purchase of such property by the debtor for that portion of the obligation that becomes due after the order for relief, reducing the payments under subparagraph (A) by the amount so paid and providing the trustee with evidence of such payment, including the amount and date of payment.”
This means that adequate protection payments must be made within 30 days of filing the chapter 13 case for allowed secured claims such as a car loan. Adequate protection in chapter 13 bankruptcy payments also reduce the amount of the chapter 13 payment until the chapter 13 plan is confirmed by the court.
How much will adequate protection payments be?
In Maryland, adequate protection payments are typically between 1-1.5% of the value of the collateral. Assuming that the car requiring adequate protection payments is worth $10,000, adequate protection payments would be $100 a month. Assuming the debtor’s plan payments are $500 a month, before confirmation, the chapter 13 plan payments would be $400 per month and the debtor is responsible for paying $100 directly to the auto finance company, while post-confirmation the chapter 13 plan payment is increased to $500 with the trustee distributing payment to all creditors, including the auto finance company.
Adequate protection seeks to balance the interests of creditors and debtors by providing some protection to a secured creditor before a chapter 13 plan is confirmed. If you have questions about adequate protection and chapter 13 bankruptcy, please call Steiner Law Group at (410) 670-7060.