Dallas Bankruptcy Lawyer: CHAPTER 13 BANKRUPTCY- WHAT IS ADEQUATE PROTECTION?
Adequate protection is a term used to describe payments made to some types of secured creditors, which protect them against depreciation of the value of their lien. For example, a creditor who has a lien attached to a car has a secured claim valued up to the fair market value of the car. Cars depreciate in value quickly. Since the collateral (the car) is depreciating in value, so is the secured portion of the creditor’s claim. In order to protect car creditors from depreciation of their collateral, they are provided adequate protection payments in Chapter 13 bankruptcy. Adequate protection payments are small payments made to the creditor beginning in the first month of a Chapter 13 plan, before the plan begins paying the creditor’s claim, which offset depreciation of the vehicle. The creditor continues to get these payments until the Chapter 13 plan provides payment to the creditor on their claim. Once the plan starts paying the creditor’s claim, adequate protection payments stop. Since the claim is now being paid, the depreciating asset is no longer a risk for the creditor, because the creditor is now being paid back faster than the asset is depreciating. In this way, adequate protection payments provide secured creditors with liens attached to automobiles protection from the risks associated with depreciating collateral.
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