It's common knowledge that a car loses its value as soon as it's driven off of the lot. Other types of personal property, such as furniture and appliances, also depreciate over time. Creditors who have accepted depreciating collateral to secure payment of a debt must repossess and sell the property quickly to prevent a financial loss.
Chapter 13 protects such creditors by requiring a debtor to make payments on the loan—called adequate protection payments—soon after filing a case. The payments give the court time to review the proposed repayment plan without bringing harm to the creditor.
Read on to learn more about adequate protection payments in Chapter 13 bankruptcy.
When you file for Chapter 13 bankruptcy, the court might not confirm (approve) your repayment plan for many months. You must continue making plan payments while the court considers your proposed plan.
But the Chapter 13 bankruptcy trustee can't distribute any payments to your creditors until the judge confirms your plan. If the bankruptcy judge dismisses your case before confirmation, those funds are generally returned to you after the trustee pays administrative costs and fees.
For a creditor holding a debt secured by depreciating personal property like a car, the security interest (lien) declines in value as time passes. As a result, bankruptcy law requires debtors to make payments called adequate protection payments to those creditors before confirmation of their plan.
Learn about secured, unsecured, and priority debt in bankruptcy.
Each bankruptcy court handles adequate protection payments differently. In many districts, the Chapter 13 plan has a separate paragraph that allows debtors to specify adequate protection payments and authorizes the trustee to disburse those amounts. Also, some bankruptcy courts automatically require the Chapter 13 trustee to distribute adequate protection payments to creditors with debts secured by personal property.
The amount of the required adequate protection payment typically depends on the value of the collateral, the amount of the monthly loan payment, and the rules in your jurisdiction. In most cases, monthly adequate protection payments range from 1% to 1.5% of the property's value.
If you fail to include adequate protection payments in your plan, some courts might not confirm it. Also, your lender can file a motion with the court to request payment. Once a bankruptcy judge confirms your case, adequate protection payments will typically stop, and the creditor will receive regular payments according to the terms of your plan.
Learn about the steps involved in a Chapter 13 case.