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What are adequate protection payments?
Question:
What are adequate protection payments?
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Adequate protection payments are used in chapter 11 reorganization plans. A certain class of creditor is protected in that they are guaranteed to receive monies owed above all others. The purpose of reorganization is to allow a business to operate in order to receive income and pay their creditors, thus ensuring the survival of said business. However, things do not always go the way they are supposed to.
How Adequate Protection Payments Come Into Play
Chapter 11 is a very complicated process to get through. The debtor is basically guaranteeing that the creditor will get paid, regardless of the situation. The situation could be that the business keeps operating in order to generate revenue and pay off the creditors, or to liquidate some assets and sell the core business, and areas in between. All creditors have to sign off on the amount of money they are to receive throughout the length of the bankruptcy. But all creditors are not created equal.
Certain creditors will have priority over others, and are to be guaranteed most, if not all, of the monies they are owed through the filing. If the business falters during the bankruptcy and needs to sell off assets, the priority creditors get their money from the sales. That is how the adequate protection payment works.
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If you are a corporation looking to file chapter 11, find an attorney who is familiar with the overall process. Many people are going to be involved in the bankruptcy and all will need to be handled correctly. It is folly to go at it without legal help.