Glossary of Bankruptcy Terminology
Most debtors who file a bankruptcy petition, and many of their creditors, know very little about the bankruptcy process. This glossary on bankruptcy terminology explains, in layman's terms, many of the legal terms that are used in cases filed under the Bankruptcy Code.
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, your are $6,000 in arrears.
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.
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 Abuse Prevention and Consumer Protection Act: The name (mis-name) given by Congress to the new bankruptcy law legislation passed and signed into law by President GW Bush, effective October 17, 2005 which was designed to dramatically changed the way eligiblity for filing bankruptcy was determined. It was neither designed to protect consumers nor to address actual bankruptcy abuse
Bankruptcy administrator - An officer of the judiciary serving in the judicial districts of Alabama and North Carolina who, like the U.S. trustee, is 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. Compare U.S. trustee.
Bankruptcy Code - The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.
Bankruptcy court - The bankruptcy judges in regular active service in each district; a unit of the district court.
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 judge - A judicial officer of the United States district court who is the court official with decision-making power over federal bankruptcy cases.
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. (There are official forms for bankruptcy petitions.)
Business bankruptcy: a case in which the majority of total debts owed are business (or, non-consumer) related.
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 judges'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 have 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).
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...". Debt Relief Agencies are required to give certain additional disclosures and incur more costs by virtue of this designation which is neither honorary nor punitive.
Debtor - A person who has filed a petition for relief under the Bankruptcy Code.
Debtor education - see credit counseling
Debtor-in-possession: This refers to the debtor in a Chapter 11 case because the debtor usually remains in possession and control of his/her/its assets. A debtor-in-possession has all the duties and rights of a trustee and is a fiduciary for the creditors of the estate and, therefore, owes them the highest duty of care and loyalty. If a debtor-in-possession fails in its duties, a separate trustee can be appointed in a Chapter 11 case and take over possession of the debtor's assets and interests.
Defendant - An individual (or business) against whom a lawsuit is filed.
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.
Disclosure statement - A written document prepared by the chapter 11 debtor or other plan proponent that is designed to provide "adequate information" to creditors to enable them to evaluate the chapter 11 plan of reorganization.
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.
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 a $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.
Family farmer or family fisherman: An individual, individual and spouse, corporation, or partnership engaged in a farming or fishing operation that meets certain debt limits and other statutory criteria for filing a petition under chapter 12.
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.)
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.
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.
Insider (of corporate debtor) - A director, officer, or person in control of the debtor; a partnership in which the debtor is a general partner; a general partner of the debtor; or a relative of a general partner, director, officer, or person in control of the debtor.
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.
Joint administration - A court-approved mechanism under which two or more cases can be administered together. (Assuming no conflicts of interest, these separate businesses or individuals can pool their resources, hire the same professionals, etc.)
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.)
Judgment proof: a debtor who has all exempt assets and income so that a creditor cannot collect anything from them even if they obtain a court judgment against them.
Lien - The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.
Lien stripping: Refers to the mechanism by which a lien (deed of trust, mortgage, etc.) against property is removed when the value of the property is less than the amount owed to any liens senior (above) the one(s) being stripped.
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.
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 nonpriority 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.
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.
New bankruptcy laws: See Bankruptcy Abuse Prevention and Consumer Protection Act
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.
Non-contingent debt: debt which is owed now without any contingent acts needing to occur first.
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.
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 bankruptcy: A bankruptcy where the majority of debts are non-business. Usually this is a Chapter 7, but can also be Chapter 11 or Chapter 13 depending on the circumstances.
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.
Petition preparer - A business not authorized to practice law that prepares bankruptcy petitions.
Plan - A debtor's detailed description of how the debtor proposes to pay creditors' claims over a fixed period of time.
Plaintiff - A person or business that files a formal complaint with the court.
Post petition: Occurring after the commencement of a bankruptcy case.
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.
Pre-petition: Occurring prior to the commencement of a bankruptcy case.
Presumption of abuse - see means test
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.
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.
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.
Small business case - A special type of chapter 11 case in which there is no creditors' committee (or the creditors' committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code contains certain provisions designed to reduce the time a small business debtor is in bankruptcy.
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.
Substantive consolidation - Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)
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. Compare, bankruptcy administrator.
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.