It works like this: a creditor with a lien on income producing assets has a lien on the cash that asset produces as well.
But you don’t have to have a traditional business to have cash collateral, and the duties it brings, in a bankruptcy reorganization.
Rents are cash collateral
The issue usually arises with rental real estate: the monthly rent is cash collateral.
In consumer cases, it is often the taxing authorities who have a blanket lien on all of the debtor’s assets.
The other, obvious but oft forgotten lien holder is the mortgage lender, whose security documents undoubtedly give it a lien on the income produced by the mortgaged property.
In any bankruptcy case in which the debtor remains in possession of his assets under the protection and supervision of the bankruptcy court, the rights of the secured lender in the cash collateral must be respected.
The debtor is prohibited from using cash collateral without either the consent of the secured creditor or a court order.
If you are using the cash
Cash collateral can be spent on anything other than paying the secured creditor only on two conditions:
- Have the secured creditor’s written consent
- Get a bankruptcy court order
Fail to get either consent or an order and appointment of a trustee, conversion or relief from stay are likely to follow.
