Struggling with “adequate protection”

The bankruptcy code seems strangely inarticulate about adequate protection:  what are we protecting and how do we measure “adequacy”?

It’s not a term defined in §101.  My class of new bankruptcy lawyers kept coming back to questions about adequate protection.

The Code offers a roundabout explanation in § 361.  We are protecting 1) creditors with an interest in property (a ha, the secureds!) from 2) diminution in value of that interest, 3) caused by some action or prohibition engendered by the bankruptcy code.

So, if the automatic stay keeps the car creditor from repossessing the car, while the car value declines, the creditor is entitled to money to protect from the diminution of the value of its secured claim as the collateral loses value.

As a result of the adequate protection payment, the value of the lien on the depreciated car PLUS the cash payment = the value of the secured creditor’s interest in the property.

Now, try explaining that to a client!  Or, you can fall back on “because the Code says so”….

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