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Bankruptcy Glossary: Bankruptcy terms & phrases
Adversary Proceeding
A lawsuit filed in the bankruptcy court which is related to the debtor's
bankruptcy case. Examples are complaints to determine the dischargeability of a
debt and complaints to determine the extent and validity of liens.
Arrears
The amount that is unpaid and overdue as of the date the bankruptcy case is
filed. The word "arrears" is usually used when referring to back child support,
back alimony owed, or the amount that is past due on mortgage payments
(including interest and penalties).
Assets
Personal possessions of value, including cash, real estate, vehicles and
investments.
Automatic Stay
An injunction that stops lawsuits, foreclosure, garnishments and all collection
activity against the debtor the exact date a bankruptcy petition is filed
Bankruptcy: By filing bankruptcy in federal court, an individual or individuals
can restructure or relieve themselves of debts and liabilities.
Avoidance
The Bankruptcy Code permits the debtor to eliminate (avoid) some kinds of liens
that interfere with (or impair) an exemption claimed in the bankruptcy. Most
judgment liens that have attached to the debtor's home can be avoided if the
total of the liens (mortgages, judgment liens and statutory liens) is greater
than the value of the property in which the exemption is claimed. This is
sometimes called "lien stripping."
Avoidance Powers
Rights given to the bankruptcy trustee or the debtor in possession to recover
certain transfers of property such as preferences or fraudulent transfers or to
void liens created before the commencement of a bankruptcy case.
Bankruptcy Code
Title 11 of the United States Code governs bankruptcy proceedings. Bankruptcy is
a matter of federal law and is, with the exception of exemptions, the same in
every state. When federal bankruptcy law conflicts with state law, federal law
controls.
Bankruptcy Estate
The estate is all of the legal and equitable interests of the debtor as of the
commencement of the case. From the estate, an individual debtor can claim
certain property exempt; the balance of the estate is liquidated in a Chapter 7
to pay the administrative costs of the proceeding and the claims of creditors
according to their priority.
Chapter 7
Chapter 7 bankruptcy is a process provided for under United States federal law
by which you are entitled to a fresh start. Chapter 7 may eliminate most kinds
of unsecured debt. It is usually designed for someone with no assets.
Chapter 11
A reorganization proceeding in which the debtor may continue in business or in
possession of its property as a fiduciary. A confirmed Chapter 11 plan provides
for the manner in which the claims of creditors will be paid in whole or in part
by the debtor.
Chapter 12
A simplified reorganization plan for family farmers whose debts fall within
certain limits. Chapter 12 was not renewed when it expired this session of
Congress.
Chapter 13
Chapter 13 is an interest-free debt repayment plan through which you consolidate
your debts and make a payment on your debt over a 3 to 5 year period. This type
of bankruptcy is often used to save a house from foreclosure or to save a car
from repossession.
Collateral
The property that is subject to a lien as for payment of a debt or performance
of a contract. A creditor with rights in collateral is a secured creditor and
has additional protections in the Bankruptcy Code for the claim secured by
collateral.
Confirmation
The process by which the Bankruptcy Judge approves a plan of reorganization of a
debtor in a Chapter 13 case.
Conversion
Cases under the Bankruptcy Code may be converted from one chapter to another
chapter; for example, a Chapter 7 case may be converted to a case under Chapter
13 if the debtor is eligible for Chapter 13. Even though the Chapter of the Code
that governs it changes, it remains the same case as originally filed.
Credit Report
A report outlining an individuals credit history, public records and credit
worthiness.
Creditor
Any person or business that a debtor owes money to.
Debtor
Any person who is liable to another for money.
Default
Failure to make payments within a specified period of time governed by the
original contract.
Delinquency
Failure to make payments when payments are due. For most mortgages, payments are
due on the first day of the month. Even though they may not charge a "late fee"
for a number of days, the payment is still considered to be late and the loan
delinquent. When a loan payment is more than 30 days late, most lenders report
the late payment to one or more of the credit bureaus.
Denial of Discharge
Penalty for debtor misconduct with respect to the bankruptcy case or creditors
as a whole. The grounds on which the debtor's discharge may be denied are found
in 11 U.S.C. 727. When the debtor's discharge is denied, the debts that could
have been discharged in that case cannot be discharged in any subsequent
bankruptcy. The administration of the case, the liquidation of assets and the
recovery of avoidable transfers, continues for the benefit of creditors.
Dischargable
Debts that can be eliminated in bankruptcy. Certain debts are not dischargeable;
that it, they may not be discharged through bankruptcy or may only be discharged
through Chapter 13. Family support and criminal restitution are examples of
debts which cannot be discharged. Debts incurred by fraud can only be discharged
in Chapter 13 bankruptcy.
Discharge
The legal term for the order eliminating a debt through a bankruptcy case. When
a debt is discharged, it is no longer legally enforceable against the debtor,
though any lien that secures the debt may survive the bankruptcy case.
Equity
A homeowner's financial interest in a property. Equity is the difference between
the value of the property and the amount still owed on its mortgage and other
liens.
Exempt
Property that is exempt is removed from the bankruptcy estate and is not
available to pay the claims of creditors. The debtor selects the property to be
exempted from the statutory lists of exemptions available under the law of his
state. The debtor gets to keep exempt property for use in making a fresh start
after bankruptcy.
Exemptions
Exemptions are the lists of the kinds and values of property that is legally
beyond the reach of creditors or the bankruptcy trustee. What property may be
exempted is determined by state and federal statutes, and varies from state to
state.
Fiduciary
One who is entrusted with duties on behalf of another. The law requires the
highest level of good faith, loyalty and diligence of a fiduciary, higher than
the common duty of care that we all owe one another. The debtor in possession in
a Chapter 11 is a fiduciary for the creditors, owing loyalty to the creditors
and not the shareholders of the debtor.
Fair Market Value
The highest price that a buyer, willing but not compelled to buy, would pay, and
the lowest a seller, willing but not compelled to sell, would accept.
Foreclosure: The legal process by which a borrower in default under a mortgage
is deprived of his or her interest in the mortgaged property. This usually
involves a forced sale of the property at public auction with the proceeds of
the sale being applied to the mortgage debt.
Garnishment
A court-ordered method of debt collection in which a portion of a person's
salary is paid to a creditor. The process by which a judgment creditor seizes
money, which is owed to his judgment debtor, from a third party known as a
garnishee.
General Unsecured Claim
Creditor's claim without a priority for payment for which the creditor holds no
security (or collateral). If the available funds in the estate extend to payment
of unsecured claims, the claims are paid in proportion to the size of the claim
relative to the total of claims in the class of unsecured claims.
Lien
A charge upon real or personal property for the satisfaction of a debt or
discharge of an obligation. Examples would include: judgments, taxes, mortgages,
deeds of trust, etc.
Liquidated
A debt that is for a known number of dollars is liquidated. An unliquidated debt
is one where the debtor has liability, but the exact monetary measure of that
liability is unknown. Tort claims are usually unliquidated until a trial fixes
the amount of the liability of the tort feasor.
Non-dischargable
A Chapter 7 bankruptcy case in which the trustee determines, after the
applicable exemptions, that there are no significant assets to liquidate. The
debtor retains all of their real and personal property.
No Asset Case
A debt that cannot be eliminated in bankruptcy. Non dischargeable debts remain
legally enforceable despite the bankruptcy discharge.
Perfection
When a secured creditor has taken the required steps to perfect his lien, the
lien is senior to any liens that arise after perfection. A mortgage is perfected
by recording it with the county recorder; a lien in personal property is
perfected by filing a financing statement with the secretary of state. An
unperfected lien is valid between the debtor and the secured creditor, but may
be behind liens created later in time, but perfected earlier than the lien in
question. An unperfected lien can be avoided by the trustee.
Personal Property
Property that is not real property or affixed to real property, such as cars,
stock, furniture, etc.
Petition
The document that initiates a bankruptcy case. The filing of the petition
constitutes an order for relief and institutes the automatic stay. Events are
frequently described as "prepetition", happening before the bankruptcy petition
was filed, and "post petition", after the bankruptcy.
Preference
A transfer to a creditor in payment of an existing debt made within certain time
periods before the commencement of the case. Preferences may be recovered by the
trustee for the benefit of all creditors of the estate.
Pre-petition
Claims or events arising before the commencement of the bankruptcy case, that
is, before the filing of the bankruptcy petition. Generally only pre petition
debts may be discharged in a bankruptcy proceeding.
Priority
The Bankruptcy Code establishes the order in which claims are paid from the
bankruptcy estate. All claims in a higher priority must be paid in full before
claims with a lower priority receive anything. All claims with the same priority
share pro rata. Claims are paid in this order: 1) costs of administration 2)
priority claims and 3) general unsecured claims. Secured claims are paid from
the proceeds of liquidating the collateral which secured the claim.
Priority Claims
Certain debts, such as unpaid wages, spousal or child support, and taxes are
elevated in the payment hierarchy under the Code. Priority claims must be paid
in full before general unsecured claims are paid.
Proof of Claim
Document a creditor files showing how much money is owed to them by the debtor,
together with all supporting evidence of such claim. There is usually a deadline
in which to file a Proof of Claim.
Property of the Estate
The property that is not exempt and belongs to the bankruptcy estate. Property
of the estate is usually sold by the trustee and the claims of creditors paid
from the proceeds.
Reaffirm
The debtor can choose to reaffirm debts that would otherwise be discharged by
the bankruptcy. Generally, when a debt is reaffirmed, the parties to the
reaffirmed debt have the same rights and liabilities that each had prior to the
bankruptcy filing: the debtor is obligated to pay and the creditor can sue or
repossess if the debtor doesn't pay.
Relief from Stay
A creditor can ask the judge to lift the automatic stay and permit some action
against the debtor or the property of the estate. If the motion is granted, the
moving party (but no one else) is free to take whatever action the court
permits. Relief can be absolute, for example, permitting the creditor to
foreclose on property, or limited, as for example, allowing the recordation of a
notice of default.
Repossession
Once in default, as defined by the creditor in the security agreement, occurs,
the creditor can: repossess the collateral by self-help (depending on state law)
or with the aid of a court order, dispose of the collateral by public or private
foreclosure sale, retain the collateral in satisfaction of the debt, terminate
the debtor's right of redemption, add the costs of repossession and foreclosure
to the unpaid balance of the debt, and pursue the debtor for any remaining
unpaid balance or deficiency.
Schedules
The debtor must file the required lists of assets and liabilities to commence a
bankruptcy case, collectively called the schedules.
Secured Debt
A secured debt is one where the creditor takes personal or real property as
collateral. A creditor whose debt is secured has a right to take property to
satisfy a debt in default. For example, most homes are burdened by a secured
debt in the form of a mortgage. This means that the lender has the right to take
the home if the borrower fails to make payments on the loan.
Trustee
A private individual or corporation appointed in bankruptcy filings who
represents the interests of the creditors in the bankruptcy estate.
Unsecured
A claim or debt is unsecured if there is no collateral that is security for the
debt. Most consumer debts are unsecured.
Unsecured Debt
A debt is unsecured if you have simply promised to pay a creditor a sum of money
at a particular time, and you have not pledged any real or personal property as
collateral for that debt. Generally, credit cards and medical bills are
unsecured debts.