List of Frequently Used Terms in Bankruptcy
Assets. Assets are all of the things that the debtor owns. The most obvious ones include items such as your home, your car, your other possessions, as well as any money in bank accounts or investment accounts. Assets may also include more intangible things as business goodwill, the right to sue someone, or stock options.
Automatic stay. An injunction which takes effect automatically as soon as you file bankruptcy, prohibiting any collection actions against the debtor, the debtor's property or the property of the estate.
Bankruptcy. A legal process where debtors who legitimately do not have the means to repay their debts may be discharged of some or all of their debts. This process may involve liquidating assets to repay creditors (Chapter 7) and/or coming up with a repayment plan to make up missed payments (Chapter 13). At the end of the bankruptcy process, any remaining debts that were not repaid are permanently discharged.
Bankruptcy Code. A part (known as Title 11) of the United States Code of general and federal statutes. It outlines the federal laws concerning bankruptcy.
Chapter 7. The most common form of bankruptcy for individuals, also available to married couples, partnerships and corporations. Chapter 7 involves liquidation - the selling of the debtor’s non-exempt assets to repay creditors a portion of what is owed to them.
Chapter 11. A form of bankruptcy only rarely used by individuals who cannot qualify for Chapter 13.
Chapter 13. A form of bankruptcy which sets out a repayment plan to repay some or all of the debts out of future income, over a period of 3 to 5 years.
Charged off. This is a term used for tax accounting term which means the creditor does not expect to be able to collect on the debt. However, it does not mean that the debt is no longer legally enforceable or that they have given up trying to collect on it.
Collateral. The property used to secure a loan, for example a home or a car. A lien is placed on that property, which means the owner may not sell it or otherwise dispose of it without settling that lien. The lender has rights to seize that collateral if the repayment terms of the loan are not being met.
Collection actions. Any actions by creditors aimed at recovering debts, such as: harassing phone calls or letters, foreclosure or threatening foreclosure, repossession or threatening repossession, selling an asset that has been repossessed.
Confirmation. A court order which makes the terms of a Chapter 13 repayment plan binding on all parties.
Conversion.When a bankruptcy case is converted from one chapter to another, such as the so-called “Chapter 20” - where a Chapter 7 case may be converted to a Chapter 13 if the debtor is eligible for Chapter 13.
Creditor. The person or entity that the debtor owes money to.
Debtor. The entity (usually a person, or may be a partnership or corporation) that owes money, and that is the subject of a bankruptcy case.
Denial of discharge. A penalty against the debtor for dishonesty or other misconduct related to the bankruptcy case. This means that the debts that could have been discharged in that case are now ineligible to be discharged in any subsequent bankruptcy. However, administration of the case and liquidation of assets to repay creditors continues.
Discharge. The legal elimination of debt through a bankruptcy case. Debts that can be repaid have been, and remaining debts are no longer legally enforceable against the debtor.
Dischargeable debts. Debts that can be eliminated through bankruptcy. Generally, unsecured nonpriority debts can be discharged. Priority debts and secured debts usually cannot be discharged.
Dismissal. Termination of the case without either a discharge or a denial of discharge. Once a case is dismissed, both debtor and creditors have the same rights and obligations as they had before the bankruptcy case was filed.
Domicile. Where you make your permanent home: your main residence, where you pay taxes and where you vote. Knowing what your legal domicile is is important, because it dictates which state you can file bankruptcy in, and which state’s exemptions you are permitted to use.
Estate. All of the debtor’s property as of the commencement of the bankruptcy case, including all legal and equitable interests the debtor has. An individual debtor can exempt certain property from the bankruptcy estate.
Exempt. Property removed from the bankruptcy estate and not available to pay the claims of creditors (in other words, property the debtor gets to keep). Which property is able to be exempted from the estate depends upon which state the debtor lives in, and whether they are able to use that state list or the federal list of exemptions.
Exemptions. The list of property that an individual debtor is permitted to exempt from the bankruptcy estate. The categories of property on the list, and the value of property that may be exempted, vary from state to state.
Liabilities. Everything you owe, all of your debts. (The opposite of assets).
Lien. An interest in property that is used as collateral to secure a debt. A debtor may not sell or otherwise dispose of property that is secured by a lien without first settling that lien with their creditor.
Liquidation. Selling a debtor’s property in order to repay debts.
Means Test. A test that was added to the Bankruptcy Code in 2005, to prevent abuse of the bankruptcy system by debtors who actually do have the means to repay their debts. It is used to determine eligibility for Chapter 7 bankruptcy, and also to determine whether a repayment plan in Chapter 13 bankruptcy is realistic and affordable for the debtor.
Meeting of Creditors (also known as the 341 meeting). A meeting that the debtor must attend in during the Chapter 7 or Chapter 13 bankruptcy process, and which the creditors may or may not attend. The debtor must verify that their statements are accurate, and may have to answer questions from their creditors or their trustee.
Personal property. Things that you own other than real estate, including assets such as cars, furniture, jewelry, bank accounts or investment accounts, etc.
Preferential payments. Payments made to creditors in the months prior to filing bankruptcy, which may be viewed as treating certain creditors preferentially compared to others. A trustee may recover payments that are seen as preferential, and redistribute those funds more evenly between creditors.
Priority debts. Certain debts that, even though they are unsecured, may not be discharged through bankruptcy. Examples include: unpaid wages, spousal or child support, and some taxes.
Proof of claim. A form filed with the court that establishes the creditor's claim against the debtor.
Property of the estate. The property that is not exempt and belongs to the bankruptcy estate. In Chapter 7 bankruptcy, this property is usually sold by the trustee to repay creditors from the proceeds.
Reaffirm. When a debtor chooses not to have a debt discharged, and to reassume the obligations of that debt. Usually, both parties to the reaffirmed debt will have the same rights and obligations that each had prior to the bankruptcy filing. The idea of bankruptcy is to discharge debts, but in some cases reaffirming a debt may be a good idea if a debtor wants to keep their home or their car, and will be able to meet the future repayment obligations.
Relief from stay. When a creditor is prohibited from collecting on a debt because of the automatic stay, but believes they have grounds to continue collecting on that debt. The creditor may ask the judge to lift, or grant relief from, the automatic stay.
Ride-through. A process where a secured debt, such as a home mortgage, has been discharged through bankruptcy, but where the debtor continues to make payments on time anyway. Although the debt has been discharged, but the creditor’s lien is still in place. However, since there are no late payments, the creditor has no grounds for foreclosure. The debtor may still continue to occupy the home,as long as they continue to make their payments on time.
Schedules. A set of forms the debtor must file when commencing a bankruptcy case, listing their assets and liabilities.
Secured debt. Debt that is secured by collateral. The creditor has a lien on the collateral that secures the debt. If the creditor does not meet repayment terms of a secured debt, their creditor can take action to seize that collateral. The most common types of secured debt are home mortgages and car loans.
Trustee. A person appointed by the court to oversee and monitor every Chapter 7 and Chapter 13 case.
Unsecured debt. A debt that has no collateral to secure the debt. If the debtor does not meet their repayment obligations, the creditor has no asset they can seize. Many unsecured debts can be discharged through bankruptcy.
Voluntary petition. The documents submitted by the debtor that initiate a bankruptcy case. It is “voluntary” because the debtor is choosing to file bankruptcy.