Chapter 13 debtors may be required to pay their secured creditors adequate protection payments. This provision (§ 361) of the bankruptcy code is derived from Fifth Amendment property protections under the “due process” clause, which, in a bankruptcy context, requires that bankruptcy debtors may not deprive creditors of their property without due process.
Debtors who file Chapter 13 cases typically seek to reorganize their debts through a plan of reorganization, which requires them to make payments for three to five years. Creditors who have secured claims for motor vehicles and other items may be paid through this plan of reorganization.
Once this three to five-year payment period begins, Chapter 13 debtors start making plan payments immediately. However, a plan of reorganization must be confirmed by the bankruptcy court, which may not occur for many months. Nonetheless, Chapter 13 debtors must continue making plan payments while the trustee and court consider the proposed plan of reorganization.
A Chapter 13 bankruptcy trustee may not distribute any payments to creditors until the bankruptcy court confirms the Chapter 13 plan. If a bankruptcy case is dismissed before confirmation, any funds in a Chapter 13 trust account are generally returned to the debtor after the trustee pays administrative costs and fees.
Those secured creditors who hold claims secured by depreciating personal property like motor vehicles will have their lien or security interest decline in value over time. Because of this loss or deprivation of property, they are entitled to adequate protection payments before confirmation of the debtor’s plan.
The bankruptcy courts in each federal district address adequate protection payments differently. Chapter 13 debtors specify adequate protection payments in their plan that authorize the trustee to disburse them. Local Rule 2083-1 delineates the procedure for debtors making adequate protection payments for cases filed in the District of Utah.
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 the jurisdiction where the case is filed. In most cases, monthly adequate protection payments range from 1% to 1.5% of the collateral’s value.
The failure to include adequate protection payments in a Chapter 13 plan may result in a case not being confirmed. Most lenders file a motion requesting adequate protection payments soon, if not immediately after a case begins. Once the bankruptcy court confirms a Chapter 13 plan, adequate protection payments typically cease as the secured creditor will now receive regular payments according to the terms of the Chapter 13 plan.
One of the Morrison Law Group’s qualified and knowledgeable bankruptcy attorneys may answer any questions about filing a Chapter 13 bankruptcy case. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.