Bankruptcy Law Terms & Definitions

Assets

Assets include real and personal property owned by an individual or entity, such as land, belongings, financial interests, and legal claims. In bankruptcy, assets can be exempt or non-exempt, depending on state laws. Exempt assets are protected from liquidation.

Automatic Stay

An automatic stay is a provision in the Bankruptcy Code that stops most collection efforts against a debtor and their property upon filing a bankruptcy petition. This protection allows debtors breathing room to reorganize their finances. Creditors cannot initiate or continue lawsuits, wage garnishments, or property seizures during the automatic stay.

Bankruptcy Code

The Bankruptcy Code is a set of federal laws governing the bankruptcy process in the United States, found in Title 11 of the United States Code. Bankruptcy laws are federal, so bankruptcy cases are handled by federal courts, not state courts. The Bankruptcy Code outlines the rules, procedures, and eligibility requirements for various types of bankruptcy filings.

Bankruptcy Discharge

A bankruptcy discharge is a court order that relieves a debtor of their obligation to repay certain debts. In a successful bankruptcy case, the discharge eliminates qualifying debts, allowing the debtor a fresh financial start. Dischargeable debts often include unsecured debts like credit card debt and medical bills.

Bankruptcy Dismissal

A bankruptcy dismissal occurs when a bankruptcy case is closed without a discharge of debts. Dismissals can be voluntary or involuntary and may happen for various reasons, such as failure to comply with court requirements. An unsuccessful bankruptcy case does not result in debt relief for the debtor.

Bankruptcy Proceedings

Bankruptcy proceedings encompass all actions taken by the Bankruptcy Court or the Bankruptcy Trustee from the filing of a bankruptcy petition to the end of the case. This includes reviewing documents, holding hearings, and resolving disputes between the debtor and creditors. The proceedings aim to ensure a fair and orderly process for all parties involved.

Bankruptcy Trustee

A bankruptcy trustee is an individual appointed by the Bankruptcy Court to oversee a bankruptcy case on behalf of creditors. Trustees review the debtor’s financial documents, liquidate non-exempt assets, and distribute proceeds to creditors in a Chapter 7 case. In a Chapter 13 case, the trustee oversees the debtor’s repayment plan and disburses payments to creditors.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets to repay creditors. It is typically used by individuals with limited income and assets. If a debtor’s assets are exempt or subject to valid liens, a trustee may file a “no asset” report, resulting in no distribution to unsecured creditors.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, or debt reorganization, allows individuals with a regular income to propose a repayment plan for all or part of their debts. Debtors make monthly payments to a Chapter 13 trustee, who disburses the funds to creditors over a 3-5 year period. This type of bankruptcy can help debtors protect assets, such as homes or vehicles, from foreclosure or repossession.

Creditor

A creditor is a person or business owed money or property by a debtor. In the context of bankruptcy, creditors may be secured or unsecured, depending on whether they have a lien on the debtor’s property. Creditors must file a proof of claim to participate in the distribution of assets during a bankruptcy case.

Credit Counseling

Credit counseling is a mandatory requirement for individuals filing personal bankruptcy. The Bankruptcy Code requires debtors to complete a credit counseling course before filing a petition and a debtor education course after filing. These courses can typically be completed online or by phone.

Debtor

A debtor is a person or company who owes debts to a creditor and seeks protection from the Bankruptcy Court. Debtors file for bankruptcy to resolve their financial difficulties and obtain relief from their debts. Depending on their financial situation, debtors may file for Chapter 7 or Chapter 13 bankruptcy.

Debt Reorganization

Debt reorganization is another term for Chapter 13 bankruptcy, which allows debtors to restructure their debts by proposing a repayment plan. This plan prioritizes certain debts, such as mortgages and car loans, while possibly eliminating or reducing unsecured debts like medical bills and credit card debt.

Debtor Education Course

A required course for individuals filing for bankruptcy, focusing on personal financial management. This course must be completed after filing but before debts are discharged, helping debtors learn strategies for managing their finances post-bankruptcy.

Equity

Equity is the difference between the fair market value of an asset and any outstanding loans or liens against it. In bankruptcy, if an asset has significant equity, it may be at risk of liquidation in a Chapter 7 case, or may need to be considered in a Chapter 13 repayment plan.

Exempt Property

Exempt property refers to assets that a debtor is allowed to keep during a bankruptcy proceeding. The specific property types and value limits for exemptions are determined by state law. Common exempt property includes a primary residence, a vehicle, tools used for work, retirement accounts, and household items.

Filing Fee

The filing fee is a charge by the Bankruptcy Court for processing a bankruptcy petition. Filing fees vary depending on the chapter of bankruptcy filed and are subject to change. This fee is separate from any fees charged by an attorney for handling a bankruptcy case.

Lien

A lien is a legal claim that grants a creditor the right to take, hold, or sell a debtor’s property as security or repayment for a debt. Common types of liens include mortgages, car loans, and filed judgments. Liens can affect the distribution of assets during a bankruptcy proceeding.

Liquidation

Liquidation is the process of converting a debtor’s non-exempt assets into cash, which is then distributed to creditors by the bankruptcy trustee. Liquidation occurs in Chapter 7 bankruptcy cases when non-exempt assets are sold to repay creditors.

Loss Mitigation

Loss mitigation refers to a range of options offered by mortgage lenders to help struggling homeowners keep their property. Common forms of loss mitigation include mortgage modifications, short sales, and deeds in lieu of foreclosure. Loss mitigation options often require a homeowner to submit a financial application to the lender.

Means Test

The Means Test is a formula used to determine eligibility for Chapter 7 bankruptcy. It considers a debtor’s income, expenses, and family size to assess if they have enough disposable income to repay some or all of their debts. Debtors who don’t qualify under the Means Test may be eligible for Chapter 13 bankruptcy.

Petition

The bankruptcy petition is the legal document that initiates a bankruptcy case when filed with the court. It typically includes the debtor’s financial information, such as assets, debts, income, and expenses. The petition and accompanying documents are collectively referred to as the bankruptcy filing.

Reaffirmed Debt

Reaffirmed debt refers to an agreement made between a debtor and a creditor during a bankruptcy case to continue making payments on a debt rather than having it discharged. Reaffirming a debt is typically done to keep collateral, such as a car or home, that a debtor can afford and wants to protect from seizure by the creditor. Only Chapter 7 debtors may reaffirm a debt.

Repayment Plan

A repayment plan, also known as a plan of reorganization, outlines how a Chapter 13 debtor intends to repay their debts over a 3-5 year period. The plan specifies the amounts and order in which debts will be repaid, subject to court approval.

Secured Debt

Secured debt is debt backed by property (collateral) that a creditor can seize and sell if the debtor defaults on the loan. Examples of secured debt include mortgages and car loans. Secured creditors have priority in bankruptcy proceedings and may recover some or all of the debt owed through the sale of the collateral.

Unsecured Debt

Unsecured debt is debt that is not backed by collateral and is based on the debtor’s promise to repay. Common examples of unsecured debt include credit card debt, medical bills, and personal loans. In bankruptcy, unsecured creditors usually receive a lower priority than secured creditors and may only receive partial repayment or none at all, depending on the debtor’s assets and the bankruptcy chapter filed.

Joint Petition

A joint petition is a single bankruptcy filing by a married couple, allowing them to address their debts together. This can simplify the bankruptcy process and reduce filing fees, but both spouses’ assets and debts are combined and subject to the bankruptcy proceedings.

Non-Dischargeable Debt

Debts that cannot be eliminated through bankruptcy, such as student loans, child support, alimony, and certain tax obligations. These debts must still be paid by the debtor even after the bankruptcy process is completed.

Preference

A preference is a payment or transfer of property to a creditor shortly before filing for bankruptcy that may unfairly favor one creditor over another. Bankruptcy trustees can potentially “claw back” preferential payments and redistribute the funds to other creditors.

Proof of Claim

A document filed by a creditor in a bankruptcy case that outlines the amount and nature of the debt owed by the debtor. This document is used to determine the legitimacy of the debt and the creditor’s right to payment from the bankruptcy estate.

Schedules

Detailed lists submitted by the debtor as part of their bankruptcy petition, outlining their assets, liabilities, income, and expenses. These schedules provide the bankruptcy court and trustee with essential information for administering the bankruptcy case.

341 Meeting (Meeting of Creditors)

A mandatory meeting held during bankruptcy proceedings, where the debtor is questioned by the bankruptcy trustee and any attending creditors. The meeting allows for transparency and offers creditors an opportunity to voice concerns or gather additional information.

Secured Creditor

A creditor with a security interest in the debtor’s property, such as a mortgage lender or car loan provider. If a debtor fails to pay their debt, secured creditors have a higher priority in bankruptcy and can repossess or foreclose on the property to satisfy the debt.

Unsecured Creditor

A creditor without a security interest in the debtor’s property. Unsecured creditors generally have lower priority than secured creditors in bankruptcy and may receive only a portion or none of their debt, depending on the debtor’s assets and bankruptcy chapter filed.

Voluntary Petition

The initial document filed by a debtor to initiate a bankruptcy case. The voluntary petition contains basic information about the debtor, the chapter of bankruptcy they are filing under, and their intention to seek relief from their debts.