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Cash Collateral, Adequate Protection, And Operating Capital

A debtor in possession may use, let out, or sell assets of the bankruptcy property in the ordinary course of its business.  However, if the proposed sale or use is outside the ordinary course of its business, the debtor should get consent from the court.

In Chapter 11 bankruptcy proceedings, cash collateral should not be collected by selling liquid assets without the consent of the secured party or authorization by the court.  The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral.  Pursuant to Bankruptcy Code, cash collateral refers to cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest.  It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.

Adequate protection may be required to protect the value of the creditor’s interest in the property being used by the debtor in possession.  This is especially important when there is a decrease in value of the property.  A party with an interest in property which is being used by the debtor may request that the court to provide adequate protection to the creditor.  The debtor may make periodic or lump sum cash payments, or provide an additional or replacement lien that will result in the creditor’s property interest being adequately protected.

Bankruptcy Code provides that when a chapter 11 debtor needs operating capital for the functioning of the business entity, it may be able to obtain it from a lender by giving the lender a court-approved super priority over other unsecured creditors or a lien on property of the estate.

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