Bankruptcy
Terms and Definitions
A
Adversary proceeding – A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court. A nonexclusive list of adversary proceedings is set forth in Fed. R. Bankr. P. 7001.
Arrearage – The amount by which one is past due on a secured debt obligation. For example, if your mortgage payment is $2,000 per month and you are three months behind, you are $6,000 in arrears.
Assets – Anything, in any form, that a debtor owns. This includes tangible assets such as real estate, cars, and jewelry, as well as intangible assets, such as business goodwill, the right to sue someone, stock options, or future interests in a will.
Assume or Assumption – An agreement to continue performing duties under a contract or lease.
Automatic stay – An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.
Avoidance – The ability to remove a lien. The bankruptcy code allows certain types of liens to be avoided, such as judgment liens if they impair an exemption claimed in the bankruptcy case.
Avoidance powers – Rights to recover certain transfers of property such as preferences or fraudulent transfers, or to void liens created prior to filing a bankruptcy case.
B
Bankruptcy – A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).
Bankruptcy Code – The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.
Bankruptcy Estate – All legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)
Bankruptcy Petition – The document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) by which opens the bankruptcy case.
C
Chapter 7 – The chapter of the Bankruptcy Code providing for “liquidation,”(i.e., the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.)
Chapter 9 – The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).
Chapter 11 – The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)
Chapter 12 – The chapter of the Bankruptcy Code providing for adjustment of debts of a “family farmer,” or a “family fisherman” as those terms are defined in the Bankruptcy Code.
Chapter 13 –The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)
Chapter 15 – The chapter of the Bankruptcy Code dealing with cases of cross-border insolvency.
Claim – A creditor’s assertion of a right to payment from the debtor or the debtor’s property.
Confirmation – Bankruptcy judge’s approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13.
Consumer Debtor – A debtor whose debts are primarily consumer debts.
Consumer Debts – Debts incurred for personal, as opposed to business, needs.
Contested Matter – Those matters, other than objections to claims, that are disputed but are not within the definition of adversary proceeding contained in Rule 7001.
Contingent Claim – A claim that may be owed by the debtor under certain circumstances, e.g., where the debtor is a cosigner on another person’s loan and that person fails to pay.
Creditor – One to whom the debtor owes money or who claims to be owed money by the debtor.
Credit Counseling – Generally refers to two events in individual bankruptcy cases: (1) the “individual or group briefing” from a nonprofit budget and credit counseling agency that individual debtors must attend prior to filing under any chapter of the Bankruptcy Code; and (2) the “instructional course in personal financial management” in chapters 7 and 13 that an individual debtor must complete before a discharge is entered. There are exceptions to both requirements for certain categories of debtors, exigent circumstances, or if the U.S. trustee or bankruptcy administrator has determined that there are insufficient approved credit counseling agencies available to provide the necessary counseling.
Creditors’ Meeting – See 341 meeting.
Current Monthly Income – The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor’s spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).
D
Debt – Liability on a claim.
Debt Relief Agency – A debt relief agency is a made-up designation that our Congress created as part of the 2005 Bankruptcy Reform Act and is defined in 11 U.S.C. 101(12A). It includes “any person who provides any bankruptcy assistance to an ‘assisted person’ in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer…”.
Debtor – A person who has filed for relief under the Bankruptcy Code.
Denial of Discharge – A creditor, trustee, US Trustee or other party in interest may, pursuant to 11 USC 727, file a complaint to deny the discharge of any debtor if certain things can be proved (such as material misstatements in the bankruptcy schedules, like omission of assets, etc.). If successful at trial, this results in the entire discharge being denied, not just the discharge of a particular individual debt.
Discharge – A release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)
Dischargeable Debt – A debt for which the Bankruptcy Code allows the debtor’s personal liability to be eliminated.
Dismissal – The termination of a case without either entry of a discharge or a denial of discharge. After dismissal, the debtor and creditors have the same rights and remedies as they had prior to the case being commenced–as if the case had never been filed (almost).
Disposable Income – In general, this is any income left over each month after you pay all your necessary monthly expenses. However, for Chapter 13 bankruptcy purposes, Congress has re-defined this to mean your current monthly income (as that term is defined, above) less allowed expenses according to IRS standards.
Domestic Support Obligation – Debts owed for alimony, maintenance or support to a child, spouse or other entity for support or maintenance of a child or spouse.
E
Equity – The value of a debtor’s interest in property that remains after liens and other creditors’ interests are considered. (Example: If a house valued at $100,000 is subject to an $80,000 mortgage, there is $20,000 of equity.)
Executory Contract or Lease – Generally includes contracts or leases under which both parties to the agreement have duties remaining to be performed. (If a contract or lease is executory, a debtor may assume it or reject it.)
Exemptions, Exempt Property – Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor’s primary residence (homestead exemption), or some or all “tools of the trade” used by the debtor to make a living (i.e., auto tools for an auto mechanic or dental tools for a dentist). The availability and amount of property the debtor may exempt depends on the state the debtor lives in.
F
Fraudulent Transfer – A transfer of a debtor’s property made with intent to defraud or for which the debtor receives less than the transferred property’s value.
Fresh Start – The characterization of a debtor’s status after bankruptcy, i.e., free of most debts. (Giving debtors a fresh start is one purpose of the Bankruptcy Code.)
G
General Unsecured Claim – A claim by a creditor against a bankrupt debtor which does not have a priority for payment and for which the creditor holds no security interest or collateral.
I
Insider (of Individual Debtor) – Any relative of the debtor or of a general partner of the debtor; partnership in which the debtor is a general partner; general partner of the debtor; or a corporation of which the debtor is a director, officer, or person in control.
Involuntary Petition – A bankruptcy case may be commenced by a specific number of creditors against a debtor without the debtor’s consent. There are specific requirements for the amount of claims the creditors must hold and number of valid creditors who may commence the case. 11 U.S.C. 303 sets forth the requirements.
J
Joint Petition – One bankruptcy petition filed by a husband and wife together.
Judgment – A court order giving a creditor the ability to take any collection remedy allowed under applicable state or federal law against a debtor (for example, wage garnishment, liens, levies, etc.)
L
Lien – The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.
Liquidation – A sale of a debtor’s property with the proceeds to be used for the benefit of creditors.
Liquidated Claim – A creditor’s claim for a fixed amount of money.
M
Means Test – Section 707(b)(2) of the Bankruptcy Code applies a “means test” to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.
Motion to Lift the Automatic Stay – A request by a creditor to allow the creditor to take action against the debtor or the debtor’s property that would otherwise be prohibited by the automatic stay.
N
Net Income – This is basically “take-home” pay. The amount you receive after necessary tax withholding deductions have been taken, union dues, insurance, etc. If you are self-employed, this is the amount left after paying your ordinary business expenses.
No-Asset Case – A chapter 7 case where there are no assets available to satisfy any portion of the creditors’ unsecured claims.
Nondischargeable Debt – A debt that cannot be eliminated in bankruptcy. Examples include a home mortgage, debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime. Some debts, such as debts for money or property obtained by false pretenses and debts for fraud or defalcation while acting in a fiduciary capacity may be declared nondischargeable only if a creditor timely files and prevails in a nondischargeability action.
O
Objection to Dischargeability – A trustee’s or creditor’s objection to the debtor being released from personal liability for certain dischargeable debts. Common reasons include allegations that the debt to be discharged was incurred by false pretenses or that debt arose because of the debtor’s fraud while acting as a fiduciary.
Objection to Exemptions – A trustee’s or creditor’s objection to the debtor’s attempt to claim certain property as exempt from liquidation by the trustee to creditors.
P
Party in Interest – A party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.
Personal Property – Any property or interests held by someone that is not real estate. For example, cars, jewelry, clothes, stocks, rights to sue someone, etc.
Plan – A debtor’s detailed description of how the debtor proposes to pay creditors’ claims over a fixed period of time.
Postpetition transfer – A transfer of the debtor’s property made after the commencement of the case.
Prebankruptcy Planning – The arrangement (or rearrangement) of a debtor’s property to allow the debtor to take maximum advantage of exemptions. (Prebankruptcy planning typically includes converting nonexempt assets into exempt assets.)
Preference or Preferential Debt Payment – A debt payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor’s chapter 7 case.
Priority – The Bankruptcy Code’s statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code’s priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.
Priority Claim – An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.
Proof of Claim – A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)
Property of the Estate – All legal or equitable interests of the debtor in property as of the commencement of the case.
R
Reaffirmation Agreement – An agreement by a chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.
Real Property – Land and, generally, anything affixed to the land.
S
Schedules – Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor’s assets, liabilities, and other financial information. (There are official forms a debtor must use.)
Secured Creditor – A creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.
Secured Debt – Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. Examples include home mortgages, auto loans and tax liens.
Statement of Financial Affairs – A series of questions the debtor must answer in writing concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an official form a debtor must use.)
Statement of Intention – A declaration made by a chapter 7 debtor concerning plans for dealing with consumer debts that are secured by property of the estate.
341 meeting – The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors’ meeting.
T
Transfer – Any mode or means by which a debtor disposes of or parts with his/her property.
Trustee – The representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee’s responsibilities include reviewing the debtor’s petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing the debtor’s plan, receiving payments from debtors, and disbursing plan payments to creditors.
U-V
U.S. Trustee – An officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors’ committees; monitoring fee applications; and performing other statutory duties.
Undersecured Claim – A debt secured by property that is worth less than the full amount of the debt.
Undue Hardship – A Congressionally-created and undefined term used to describe the level required to discharge a student loan in bankruptcy.
Unliquidated Claim – A claim for which a specific value has not been determined.
Unscheduled Debt – A debt that should have been listed by the debtor in the schedules filed with the court but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)
Unsecured Claim – A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay.
Voluntary Petition – A bankruptcy petition may be commenced by the debtor, as a voluntary petition, or it can be commenced involuntarily by creditors (see involuntary petition).
Voluntary Transfer – A transfer of a debtor’s property with the debtor’s consent.