What is Cash Collateral in a Chapter 11 Bankruptcy?
Is your business considering the possibility of filing for Chapter 11 bankruptcy? Whether you are merely considering a Chapter 11 bankruptcy filing or are planning to file in the near future, it is important to learn about key terms that will become relevant in your bankruptcy filing. One term that you should understand is “cash collateral.” While that term also may have meaning to you outside the bankruptcy process, it has particular significance when a business or individual files for Chapter 11 bankruptcy. Our West Palm Beach bankruptcy lawyers can discuss “cash collateral” with you and the relevance of this term to your impending Chapter 11 bankruptcy case.
Understanding Cash Collateral in a Bankruptcy Case
When a business in South Florida files for Chapter 11 bankruptcy, the filing of the bankruptcy petition then “automatically creates an estate consisting of all property owned by the debtor at the time of filing,” and “for any business, this property includes cash,” according to the U.S. Trustee Program. Then, under the U.S. Bankruptcy Code, any cash (or “cash equivalents”) are defined as “cash collateral.” As the Trustee Program clarifies, in Chapter 11 bankruptcy cases, it is common for “a secured creditor, such as a bank or federal government, [to] hold a security interest in cash collateral.”
In other words, any cash that is part of the business’s bankruptcy estate should be considered cash collateral. Why does a business that has filed for Chapter 11 bankruptcy need to know what constitutes cash collateral? In short, there are very specific rules concerning the use of cash collateral in a Chapter 11 business bankruptcy case.
Prohibited Use and Misuse of Cash Collateral in a Chapter 11 Bankruptcy Case
The Bankruptcy Code specifically prohibits debtors — that is, the business filing for Chapter 11 bankruptcy — to spend any cash collateral “without the consent of all parties that have an interest in the collateral, or a court order.” If a business that has filed for Chapter 11 bankruptcy does use cash collateral without the consent of the secured creditors or permission from the court, then the debtor may face financial penalties in addition to putting their bankruptcy case at risk.
It is important to know that implied consent from a secured creditor may not be enough to constitute the consent required by the Bankruptcy Code. Indeed, as the Trustee Program clarifies, given how severe the penalties can be “for misuse of cash collateral,” any business that has filed for Chapter 11 bankruptcy should “seek a consensual agreement incorporated into the cash collateral order.”
Contact a West Palm Beach Bankruptcy Attorney
Are you planning to file for Chapter 11 bankruptcy, or do you have questions about how a Chapter 11 bankruptcy filing could help your business? You should contact an experienced West Palm Beach bankruptcy lawyer at Kelley, Fulton, Kaplan & Eller to discuss your circumstances. For many businesses in South Florida, Chapter 11 bankruptcy filings allow them to reorganize debts and catch up with creditors while remaining open to serve clients and customers. This type of reorganization bankruptcy ultimately allows businesses across the country to restructure their debts and to become a stronger, operating company. An attorney at our firm can tell you more about Chapter 11 bankruptcy.
Sources:
justice.gov/archive/ust/articles/docs/cashcoll-01.pdf
law.cornell.edu/uscode/text/11/363
