Cash Collateral in Bankruptcy Cases

Cash collateral is cash, negotiable instruments, title documents, securities, deposit accounts, rent received from a debtor’s tenants, inventory and other cash equivalents that a creditor has a secured interest in regarding a Chapter 11 business bankruptcy case.  Conversion of the assets into cash may be needed to pay off creditors.   Property such as inventory, machinery and equipment are considered hard collateral and generally can be sold in the normal course of business without obtaining the creditor's approval.  The debtor is not allowed to use the cash collateral for any reasons without the permission of the creditor and pursuant to court order.  If businesses need cash to continue running, they should request permission from the court at the time they file the Chapter 11 to make it easier for the business to run smoothly.  Otherwise, the debtor will need to make an emergency motion at a later date if the debtor and creditor cannot come to an agreement.  Sometimes the parties agree to replace the lien with newly acquired equipment or inventory of equal or greater value purchased with the cash collateral.   

Penalties

There is no special remedy under the bankruptcy code for debtors that use collateral without the permission of the creditor and the court.   Courts can sanction penalties against the debtor for using cash collateral without the creditors approval.  Typical penalties include:

• Making the debtor repay the creditor
• Not discharging a debt
• Finding the debtor in contempt of court and issuing a fine or punitive damages

The collateral should only be spent with the authority of the court.

Legal Assistance

You should speak with a bankruptcy attorney if you have questions regarding cash collateral or other Chapter 11 bankruptcy questions. The attorney is an expert at bankruptcy laws and can help you file an emergency motion with the court if you need to use your business cash to run your business, and you cannot come to an agreement with your creditor. The attorney can help you negotiate a repayment plan with your creditors as well.