Challenge Period

Allocation of time at the beginning of a Chapter 11 case, usually between 60 and 75 days, often heavily negotiated or litigated between the lender and creditors’ committees, that is reserved for a creditors’ committee to investigate the liens of secured creditors and potential claims against such creditors. Lenders often require as a condition of agreeing to a Cash Collateral Order or DIP Financing Order that the debtor and the bankruptcy estate acknowledge the validity and enforceability of the lender’s liens as well as waiving any claims and potential claims against the lender. Debtors frequently lack the negotiating leverage to resist such requirements, and the bankruptcy courts sometimes require that a challenge period be reserved to allow a creditors’ committee to conduct an investigation of the lender’s liens and potential claims against the lender for the benefit of the bankruptcy estate. In some jurisdictions a challenge period is expressly set by local rule.

See also Avoidance Action, Cash Collateral Order, Creditors’ Committee, DIP Financing Order, Strong Arm Powers.

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