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Cash Collateral

When a business files for chapter 11 bankruptcy protection, the first question is what happens to the cash held in the business bank accounts and to the future business income – after all this is the lifeblood of the business. If the debtor has creditors with a security interest in the business inventory and its proceeds, the cash generated from the sale of these goods is considered cash collateral.

The bankruptcy code defines cash collateral as “cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalencies” in which others have an interest. See link outlining cash collateral in bankruptcy.

Simply stated, a debtor may obtain use of cash collateral by agreement with the secured creditor. Alternatively, a debtor can receive approval to use cash collateral by filing a motion with the court in which a hearing will be held. The debtor needs to demonstrate that the secured creditor’s interest will be adequately protected. The purpose is to protect the secured creditor from diminution in value of its collateral while still in the hands of the debtor.

This must be addressed early in the case as otherwise the debtor may be prohibited from using its cash. The penalties for its unauthorized use can be harsh. Some courts have clawed-back unauthorized payments made by the debtor. For this reason, such motions are filed alongside the filing of the bankruptcy. This is known as first day motions - matters which require immediate attention for the business to operate and are filed alongside the filing of the bankruptcy.

  • ABC News
  • American Civil Liberties Union
  • CBS 4
  • CNN
  • Daily Business Review
  • Florida Trend's - Florida Legal Elite 2014
  • Florida Trend's - Florida Legal Elite 2014
  • National Association of Consumer Advocates
  • National Association of Consumer Bankruptcy Attorneys
  • NBC News
  • National Consumer Law Center
  • The New York Times
  • Avvo
  • Avvo
  • Avvo
  • Avvo
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