What Is a Roll Up in a Bankruptcy Case?

By Tom Streissguth

Bankruptcy provides a debtor temporary protection from creditors while his financial affairs go through a reorganization. During the process, the debtor may need additional financing to keep a business going and to continue paying creditors under the bankruptcy plan. One method to keep the debtor's financing options open is to offer unpledged assets as collateral. Such a "roll-up" will give an unsecured creditor a higher, "priority" claim on the debtor's assets.

Bankruptcy provides a debtor temporary protection from creditors while his financial affairs go through a reorganization. During the process, the debtor may need additional financing to keep a business going and to continue paying creditors under the bankruptcy plan. One method to keep the debtor's financing options open is to offer unpledged assets as collateral. Such a "roll-up" will give an unsecured creditor a higher, "priority" claim on the debtor's assets.

Business Bankruptcies

In personal bankruptcy, courts will not, in general, allow a debtor to take on additional loans. However, for a Chapter 11 business reorganization, the debtor may secure new financing in order to keep his doors open while the court-appointed trustee supervises a reorganization of the business. This approach gives creditors a better chance to see a return on their loans, and debtors a chance to generate more income and get back in the black.

Get a free, confidential bankruptcy evaluation. Learn More

Roll-Ups and Debt

Of course, lenders need some collateral to secure any loan they make to a business in bankruptcy. A secured loan has a higher priority in the process, giving the creditor a better chance for full repayment. With the court's permission, a business in Chapter 11 may offer roll-up financing, in which it uses its own assets to secure new loans from a creditor, which become priority "administrative expenses" while the bankruptcy is in progress.

Conditions on Roll-Ups

Any new loan is subject to court approval, in any form of bankruptcy. But in general, a bankruptcy court will approve roll-up financing if it allows a business in bankruptcy better loan terms than those offered by other lenders. If it does, the result benefits the bankruptcy estate -- and all creditors -- by giving the debtor more financial leeway to repay his debts. It also helps the debtor avoid total liquidation of the business, in which creditors could expect no more than a partial repayment of their loans.

New Debt, New Priority

Roll-ups are not just practical for ongoing operating capital. If the debtor borrows enough to pay some or all of his "pre-petition" unsecured loans, a roll-up converts that debt into "post-petition" secured debt. In addition, the lender gains a stronger position in the bankruptcy and the ability to veto any plan of reorganization proposed by the trustee. The lender also gains a claim on all the assets of the debtor by virtue of the higher priority the law gives to the debt.

Get a free, confidential bankruptcy evaluation. Learn More
Bankruptcy Laws Regarding Mortgage

References

Related articles

Does the Bankruptcy Court Allow You to Pay Outside the Chapter 13 Plan?

When you file a petition for bankruptcy protection, you are asking a federal court to protect you from creditors. The court issues an automatic stay of all collection actions, including lawsuits, and gives you time to reorganize your finances and prepare for a fresh start. In a Chapter 13 bankruptcy case, you set up a partial repayment schedule under the guidance of a court-appointed trustee, but you still may be able to handle some debts outside of the repayment plan.

Local Bankruptcy Rules for Montana

Montana debtors in financial trouble may file for bankruptcy protection under Chapter 7 or Chapter 13 of the federal bankruptcy code. In a Chapter 7 case, a court-appointed trustee seizes assets and sells them in order to repay creditors. In a Chapter 13, the trustee prepares a repayment schedule, which allows the debtor to repay a portion of his debt over several years. Montana has its own set of rules that guide bankruptcy cases filed in the state.

Can Someone in Chapter 13 Bankruptcy Get a Passport?

Debtors file for chapter 13 bankruptcy to obtain a fresh financial start by reorganizing and repaying their debts. Filing for bankruptcy doesn't make you ineligible for obtaining a U.S. passport. However, falling behind in child support payments can result in the denial of your passport application.

Related articles

Categories of Bankruptcy

Individuals or businesses who are overwhelmed with debt might find a solution and a fresh financial start through the ...

Adverse Effects of Bankruptcy

Bankruptcy is among the most effective options for getting out of debt, but bankruptcy comes with a number of adverse ...

Chapter 7 Relief of Stay

In a Chapter 7 bankruptcy, a debtor petitions the court for protection from lawsuits and collection efforts. As soon as ...

Chapter 7 Bankruptcy & Recovery

Chapter 7 bankruptcy, like other types of bankruptcy, gives debtors the chance to start over with a financial clean ...

Browse by category