Bankruptcy terms & definitions
Bankruptcy is a difficult process to consider. It can be especially stressful without understanding the complex, legal-specific terms involved. We’ve broken down some of the most common terms so you can do your research headache-free.
Asset(s): Assets are all the real (land) and personal (belongings) property that you own or in which you have an interest. Assets also include, but are not limited to financial interests such as bank accounts, cash, stocks, and rights you can assert such as legal claims (lawsuits), property distributions and some inheritances. Each state has its own laws for protecting certain assets in bankruptcy called “exemptions”
The Automatic Stay: The primary protection from your creditors offered by the Bankruptcy Code. The Automatic Stay (11 U.S.C. 362) is the law that requires your creditors to stop most collection efforts against you and your property as soon as your Bankruptcy Petition is filed with the Court.
Bankruptcy Code: Collectively, the set of Federal laws that provide the primary basis for the bankruptcy system. The Bankruptcy Code can be found in Title 11 of the United States Code. Because bankruptcy laws are federal laws, bankruptcies are handled by the Federal court system, i.e. not state courts.
Bankruptcy Discharge: The court order which relieves/forgives a filer of her debts is called a discharge. A bankruptcy is considered “discharged” at the end of a successful case. In a Chapter 7 bankruptcy, this occurs after the trustee has determined there are no assets to be sold, or after any non exempt assets have been sold and creditors paid. Under Chapter 13, an eligible debtor receives her discharge upon completion of her repayment plan. A “discharge” should not be confused with a “dismissal.” See, “Bankruptcy Dismissal” below.
Bankruptcy Dismissal: A “dismissal” is the unsuccessful end to a bankruptcy, regardless of Chapter. Dismissals may occur for any number of reasons and may be voluntary or involuntary. A bankruptcy case that is dismissed does not result in a discharge of debts.
Bankruptcy Proceedings: All actions taken by the Bankruptcy Court or the Bankruptcy Trustee after a Petition is filed and before the end of the case.
Bankruptcy Trustee: This is the person appointed by the Bankruptcy Court, to act on behalf of the creditors and otherwise oversee the case. The trustee is not a judge. Initially the Trustee’s job is to prevent abuse of the bankruptcy system by ensuring a debtor has not left any significant information off his or her petition and schedules. In a Chapter 7, the trustee reviews the debtor's petition, liquidates property (if any), and distributes the proceeds to creditors. In Chapter 13 filings, the trustee oversees the debtor's repayment plan, receives payments from the debtor and disburses the money to creditors.
Chapter 7 Bankruptcy: The bankruptcy process that most think of when they think of bankruptcy. It is a “liquidation” of all non-exempt assets for the benefit of a debtor’s creditors. If all the debtor's assets are “exempt” or subject to valid liens, the trustee will normally file a "no asset" report with the court, and there will be no distribution to unsecured creditors. Most chapter 7 cases involving individual debtors are no asset cases. A person filing for Chapter 7 must financially qualify for it under the Means Test.
Chapter 13 Bankruptcy: Commonly called “Debt Reorganization”, the bankruptcy process that allows individuals with a regular income to propose a plan to repay all or part of their debts. Debtors generally will make monthly installment payments to the Chapter 13 Trustee to repay creditors over a 3 - 5 year period. A Chapter 13 is typically the type of bankruptcy used when a debtor needs to protect a home from foreclosure, a vehicle from repossession, or assets from the IRS or state taxing authority. A Chapter 13 is also often the preferred choice of small business owners who need personal debt relief.
Creditor: A lender. A person or business owed money or property by a bankruptcy debtor.
Credit counseling: A legal requirement for any person who wants to file a personal bankruptcy. Generally, the Bankruptcy Code requires all debtors to complete a credit counseling course prior to filing a petition. The course is widely available online or by phone. All debtors must then take a similar financial management course after the filing of the petition and prior to the discharge of his or her case.
Debtor: The person or company who owes debts to a creditor and seeks protection from the Bankruptcy Court.
Debt Reorganization: Another name for a Chapter 13 Bankruptcy. A Chapter 13 “reorganizes” your debt by forcing your creditors to agree to accept repayment of the debt owed to it in accordance with bankruptcy law. For instance, Chapter 13 allows a debtor to prioritize repaying past due amounts owed on mortgages and vehicle loans while not paying medical bills or credit card debt.
Exempt property: An individual filing either a Chapter 7 or Chapter 13 bankruptcy may declare certain types and/or value of property, whether land, money or belongings as “exempt” or protected from his or her creditors. Each state creates its own list of what property can be exempt and what the maximum value of that property can be. In New York, like in many states, your home, 1 vehicle, tools used for work, retirement accounts and common household items can be exempted to some extent. Property that is exempt cannot be forcibly sold during the bankruptcy process.
Filing Fee: The fee that the Bankruptcy Court charges a debtor to file a Petition with the Court. This fee may be collected, for convenience, by your attorney, but is not part of any fee that your attorney may charge you to handle your case. The filing fee is different for each Chapter of bankruptcy and is changed by the Court from time to time.
Lien: A legal interest that allows a creditor under certain circumstances to take, hold and sell a debtor's property for security or repayment of a debt. Common liens include mortgages, car loans, and filed judgments.
Liquidation: The sale of a debtor's non-exempt assets. The sale turns assets into a "liquid" form — cash — which is then disbursed to creditors by the case trustee.
Loss Mitigation: The collection of options offered by a mortgage lender to help a struggling homeowner keep his or her property. Common forms of loss mitigation are mortgage modifications, short-sales, and deeds-in-lieu of foreclosure. Most loss mitigation options require a homeowner to apply for help with a financial application. The Bankruptcy Courts of the Northern District of New York offer a voluntary program through which homeowners and lenders can apply for loss mitigation options under the supervision of the Court.
Means Test: The Means Test is a mathematical formula used to determine who is eligible to file a Chapter 7 Bankruptcy. The Means Test takes into account your income, expenses and family size to determine if you have enough disposable income to repay your some or all of your debts. For those who do not qualify under the Means Test, a Chapter 13 may be available to restructure and repay at least a portion of your debts.
Petition: The Voluntary Petition or simply “Petition”, is the legal document that needs to be filed to start a bankruptcy with the bankruptcy court. The petition is usually accompanied by the Debtor’s Schedules of Assets, Debts, Income and Expenses, among other documents and is collectively and commonly referred to as the Petition.
Reaffirmed Debt: When a debt is reaffirmed means that the debtor has entered into an agreement with a lender during a bankruptcy to continue making payments on the account rather than allow the debt to be discharged. Debts are usually reaffirmed to allow a debtor to keep a piece of collateral, such as a car or home, that they can afford and otherwise don’t want a creditor to seize. Only a Chapter 7 debtor may reaffirm a debt.
Repayment Plan: Common name for the “Plan of Reorganization” filed by a Chapter 13 Debtor which details how and to what extent a debtor intends to repay his or her debts over the course of the 3 - 5 years of a Chapter 13 bankruptcy.
Secured debt: Debt backed by reclaimable property. Or put another way, a debt that if not paid in accordance with the lending agreement allows the creditor to seize the property (collateral) that was pledged and sell it to pay back the debt. For example, your mortgage secures the repayment of the debt owed on your home. In the case of an auto loan, the vehicle itself is the collateral that the lender may seize to satisfy the debt if you do not pay.
Unsecured debt: A debt that does not give a creditor the right to take property from the debtor if payment is not made. Common types of unsecured debt are credit cards, personal loans and medical bills.
If you have any bankruptcy-related questions or concerns, please don’t hesitate to reach out to us. Helping you is what we do.