Use of Cash Collateral in Chapter 11 Bankruptcy
Chapter 11 allows a business owner to enter into an agreement (reorganization plan) with creditors that allows the business to continue to operate. The formulation of this plan and acceptance by creditors rarely happens before the bankruptcy case is filed. During the time between the filing of a Chapter 11 bankruptcy petition and the confirmation of a reorganization plan, business continues as usual, subject to certain reporting requirements. The business owner is then acting as a “debtor in possession.”
Although the debtor in possession may continue to use assets in the ordinary course of business, there are restrictions on the use of cash collateral. Consulting with a qualified business bankruptcy attorney can help you avoid problems in accessing cash for your business. Cash collateral is defined under the bankruptcy code as:
- Cash
- Accounts
- Rents
- Proceeds
- Securities
- Accounts receivable in which a creditor has perfected security interest, or lien
Bankruptcy Court Determines Adequate Creditor Protection
Because cash is often the lifeblood of a business, a motion to use cash collateral is often filed concurrently with the bankruptcy petition, unless an agreement for the use of cash collateral can be negotiated with the secured creditors. The issue of cash collateral use must be resolved to the satisfaction of all parties early on in a Chapter 11 bankruptcy in order for the business to continue operations. The bankruptcy court will determine if the secured creditors’ interest is adequately protected when the business owner uses or spends cash collateral and will approve an operating budget for the debtor’s use of the funds. The unauthorized use of cash collateral can carry significant penalties.
