Valuation of Collateral

The bankruptcy court’s determination of the value of the lender’s collateral controls, among other things, the amount of the lender’s secured claim (and, if undersecured, its unsecured claim) and whether the lender will be entitled to interest and attorneys’ fees while the bankruptcy case is pending. Bankruptcy Rule 3012 permits a party in interest to seek such a valuation.

Bankruptcy courts value a lender’s collateral for various purposes and at different times in the case. The court-determined value will often depend on whether the court uses liquidation value or going concern value for the lender’s collateral.

At the outset of a case the court may value the lender’s collateral to determine whether the lender is adequately protected from potential losses resulting from the debtor’s proposed use of the lender’s collateral during the course of the case. If the court finds that the lender has a large “equity cushion” (the value of the collateral in excess of the lender’s debt), the court may determine that the equity cushion, by itself, adequately protects the lender’s position.

Collateral valuation also controls whether the lender will be entitled to postpetition, pre-confirmation interest on its claim because only oversecured creditors are entitled to such interest.

Finally, a Chapter 11 plan must provide for payment in full, with interest, of a secured creditor’s secured claim, and the valuation process will determine the amount of that claim.

Bankruptcy Code § 506(a), (b). See also Adequate Protection, Credit Bid Rights, Deficiency Claim, Eat Dirt Plan, Equity Cushion, Going Concern Value, Liquidation Value, Market Value, Oversecured Creditor, Secured Claim, Undersecured Creditor, Unsecured Claim.

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