Equity Cushion

“The lender is oversecured to the extent of its equity cushion, a generally enviable position in bankruptcy until the debtor uses the lender’s oversecured status as an excuse to merely accrue and not pay the oversecured creditor accruing interest and attorneys’ fees on its claim while the case is pending. Many argue that it is unnecessary and even illegal to make any payment to the lender after commencement of the case and that, instead, interest and fees should accrue until the equity cushion is exhausted. Others argue that the equity cushion must be maintained, at least at some level. The debtor will also argue, in connection with its motion to use cash collateral, that the equity cushion itself provides sufficient adequate protection to justify the debtor’s use of cash collateral even if there is erosion of the cushion.”

This definition is courtesy of our friends at Polsinelli who publish the Devil’s Dictionary of Bankruptcy Terms. You can access the Devil’s Dictionary here.

For more information about equity cushion, read Giving Secured Creditor Substitute Collateral in a Chapter 11 Cramdown and Valuation: The Pillar of Corporate Restructuring.

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