In Chapter 13 bankruptcy, debtors sometimes pay automobile claims as part of their Chapter 13 plan. Creditors don’t begin receiving payments right away. The trustee usually begins disbursing payments after confirmation of the plan. This creates a problem for creditors holding claims secured by automobiles. Cars depreciate quickly which means that the creditor’s secured interest in the vehicle loses value. When a debtor is making regular payments to the creditor this isn’t a problem, because as the collateral depreciates in value the claim is also reduced. But when a debtor files Chapter 13 bankruptcy and provides payment of an automobile claim in the plan, the creditor may not receive a payment for six months, and during that time the vehicle continues to lose value.
To address this problem, the court provides adequate protection payments to the creditor in order to protect them from the loss associated with depreciation of the collateral. Some vehicles depreciate faster than others, but the actual depreciation rate isn’t considered when determining the adequate protection payment amount. In the Northern and Eastern Districts of Texas, adequate protection payments are 1.25% of the claim amount each month paid to the creditor beginning in the first month of the bankruptcy and ending once the plan is confirmed. This amount is set by the court’s local rules. The adequate protection payments are deducted from the creditor’s claim each month. These payments also ensure that the creditor gets payments each month before confirmation just in case the Chapter 13 plan is not confirmed and ends up being dismissed. Other types of creditors receive no payments if the plan isn’t confirmed.