Chapter 11 bankruptcy: cash collateral explained

When your business is in financial distress, Chapter 11 bankruptcy may be your best option. But it’s a complicated process with many variables, restrictions and decisions which need to be made. Cash collateral is a potential option many businesses will choose, so it’s important to understand what it means.

First Day Motions

As soon as you file for Chapter 11 bankruptcy, restrictions are placed upon both your business and your creditors. This is intended to give the business time to restructure and reorganize, so that it can eventually emerge from bankruptcy solvent once again. But every case of bankruptcy is different and there will be actions a business wants to take immediately to improve its chances. First Day Motions are the means by which the business takes those particular actions – they are requests to the bankruptcy court for emergency action on particular issues relevant to the business.

Cash collateral

Although First Day Motions will vary from business to business, cash collateral is a common request to make. When granted, it allows the business to use cash or cash equivalents, in which a creditor has some interest, for the purpose of non-discretionary spending. Cash collateral gives a business the means to keep the lights on and the business running while it formulates its plan and proceeds through bankruptcy.

Bankruptcy Code Section 363 controls what can be used as cash collateral and how it’s permitted. The creditors themselves can agree to allow a business to use cash collateral in which they have an interest. This will depend greatly on the relationship between the business and the creditor and their level of trust. Often, the creditor will not approve. If it doesn’t, cash collateral can only be obtained by order of the court – hence, the First Day Motion.