Glossary

Adequate Protection

A bankruptcy law concept requiring that a secured creditor's collateral position be protected against diminution in value during the bankruptcy case, typically through periodic cash payments, replacement liens, or other means, as a condition of continuing the automatic stay against that creditor.

Adequate protection exists to balance the debtor's breathing room under the automatic stay against the secured lender's constitutional and statutory right not to have its collateral position eroded while the case proceeds — if a lender can show the property is declining in value, depreciating, or that cash collateral is being spent without adequate protection, the court may order the debtor to make protective payments or, in the extreme, grant the lender relief from the stay to foreclose. Adequate protection disputes in CRE bankruptcies frequently center on competing appraisals of collateral value and competing expert projections of the property's operating trajectory, since the amount (if any) of adequate protection payments owed depends directly on whether the lender is deemed underwater or oversecured. Lenders that are determined to be undersecured are generally not entitled to receive interest as part of adequate protection, whereas oversecured lenders may be entitled to accruing interest and reasonable fees under the Bankruptcy Code.