In Chapter 13 bankruptcy, creditors who have debts secured by depreciating personal property (such as car loans) are entitled to receive adequate protection payments while the court reviews your proposed repayment plan. Read on to learn more about what adequate protection payments are in Chapter 13 bankruptcy.
When you file for Chapter 13 bankruptcy, the court may not confirm (approve) your repayment plan for many months. You must continue making plan payments while the court considers your proposed plan. But the bankruptcy trustee can’t distribute any payments to your creditors until your plan is confirmed. If your case is dismissed prior to confirmation, those funds are generally returned to you after the trustee pays administrative costs and fees.
For a creditor whose debt is secured by depreciating personal property like a car, this means that its security interest (lien) is declining in value as time passes. As a result, bankruptcy law requires debtors to make payments (called adequate protection payments) to those creditors prior to confirmation of their plan.
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 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 may not confirm it. In addition, your lender can file a motion with the court to request payment. Once your case is confirmed, adequate protection payments will normally stop and the creditor will receive regular payments according to the terms of your plan.