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Bankruptcy Tip: Make Sure Debtor In Chapter 11 Or Chapter 12 Bankruptcy Has Permission To Use Cash Collateral

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Patricia J. Scott
Foster Swift Agricultural Law Update
December 2011

Generally Chapter 11 and 12 bankruptcies are reorganizational, which means the debtor (farmer) will file a plan and pay back creditors.  Once the debtor files bankruptcy, the debtor is not allowed to use the cash of the company that is pledged as collateral without: (1) permission from the secured creditor(s); or (2) an order from the court allowing it to use cash collateral.

In most instances absent an agreement with its secured creditors, the debtor will petition the court for permission to use cash collateral at the same time it files for bankruptcy.  Any time you receive notice that a farm (or farmer) that you do business with has filed Chapter 11 or Chapter 12 bankruptcy, it is recommended that you determine whether the debtor has permission to use cash collateral.  In the event that the debtor does not have permission to use cash collateral, you may not wish to conduct business with and/or sell goods to the debtor.  If you do sell goods to a debtor who does not have permission to use cash collateral, it may result in your not getting paid from the debtor.

If you have any questions regarding to dealing with a debtor in Chapter 11 or Chapter 12 bankruptcy, please contact Scott Chernich.