Our Guide to Bankruptcy Terminology

341 Meeting or Meeting of Creditors

The first hearing everyone who files for bankruptcy must, and their creditors may, attend.  Except in large Chapter 11s, it is overseen and conducted by the trustee assigned to the case.  It is an inquiry into the property, income, and financial situation of the debtor.

707(b)

A section of Chapter 7 bankruptcy law relating to dismissal of bankruptcy cases for “abuse” typically because the debtor is considered to have sufficient disposable income to repay some portion of unsecured debt in a Chapter 13 plan instead of wiping it all out.

2004 Exam

A court-ordered examination of a party to a bankruptcy case outside the normal hearing process.  Taken under oath.  Similar to a deposition in a civil case.

Abuse

In a Chapter 7 proceeding, it is typically being projected to have even a relatively small amount of income left over each month that could be used to repay unsecured creditors. Sometimes, it relates to other financial circumstances which indicate the debtor is not acting in “good faith” in seeking bankruptcy relief.

Adequate Protection

A stream of payments or equity, or both, available to a secured creditor in order to allow a debtor to continue to retain and use collateral. Also normally includes insurance on the collateral.

Adversary Proceedings

A separate lawsuit within a bankruptcy case. It can be brought by many different parties to the bankruptcy case to either bring money or property into the case, to vindicate various rights, or to force a party to do something required or related to the bankruptcy proceeding. A separate filing fee is often charged.  It’s basically a whole new case.

Administrative Expense

The costs of a bankruptcy estate. Typically, these consist of bankruptcy trustee commission, trustee attorney fees, court costs, auditor or examiner fees, liquidator’s costs, and sometimes the debtor’s attorney fees.

Arrearage

The amount due but not yet paid on a debt. In consumer bankruptcy cases, it is most commonly referring to the amount owed on a mortgage to bring the loan “current” under the mortgage contract.

Assets

In the broadest legal sense, this is all the things a debtor owns or to which he or she has any legal rights.

Typically, this means actual things like real estate (a home or other building) or personal property (like household goods, automobiles and so on). And it can also mean intellectual property like copyright works, patents, inventions, or designs.

It can also be claims against others for things like personal injury, breach of contract or simply debts owed.

Automatic Stay

A provision of bankruptcy law which immediately stops debt collection activity of most kinds. It similar to, but not precisely the same as, a restraining order by a court commanding someone to stop doing something.

The idea of the automatic stay is to provide a debtor some peace and quiet from the constant demands of his or her creditors in order to either assist the court and its officers in the completion of the liquidation of non-exempt property (in Chapter 7) or in order to prepare, propose and (typically) carry out the terms of a reorganization plan (in Chapters 11, 12, and 13).

BAPCPA

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as the 2005 amendments.  The most significant changes to bankruptcy law since 1978.

Bad Check

A negotiable instrument drawing on an account without sufficient funds to pay the amount on the instrument or on a closed account. In certain circumstances, the presenting of a bad check for payment is a criminal act.

Bankruptcy Code

A section of federal law. Title 11 of the United States Code, to be exact.

Although state law affects various property and legal rights in the bankruptcy process, there is no separate bankruptcy law for each state.

Bankruptcy Estate

The property owned by a debtor upon filing bankruptcy, plus certain property acquired or earned during the case, and certain inheritances received during the 6-monthe period after filing. The estate can also recover certain property that may have been given or taken away during specific time periods prior to the beginning of the case.

The estate is also limited to property to non-exempt assets and property not excluded from the estate by law (e.g. 401(k) plans), or removed from the estate by operation of law or by motion and order of the court.

Budget

A debtor’s actual or projected income and expenses, typically measured on a monthly basis.

Sometimes the term is used as a reference to specific forms, Schedules I & J, filed in the bankruptcy case.

Chapter 7

The core subsection of bankruptcy law called “liquidation” since it provides for the non-exempt assets of the bankruptcy estate to be sold and used to repay creditors.

Chapter 11

The subsection of bankruptcy law called “reorganization” since it is allows the debtor (often as a debtor-in-possession) to propose a plan reorganizing financial affairs so that creditors can be repaid in whole or part from future income and/or liquidation.  There is a relatively new part of Chapter 11, Subchapter V which makes small Chapter 11 cases more closely resemble Chapter 13 as well.

Chapter 12

The subsection of bankruptcy law designed for small farms to reorganize their financial affairs under a plan they propose so that creditors can be repaid in whole or in part from future income and/or liquidation.

Chapter 13

The subsection of bankruptcy law sometimes called “wage earner plan” for consumers and some small business owners with regular income and limited debt to reorganize financial affairs under a plan they propose so that creditors can be repaid from future income and/or liquidation.

Chapter 15

The subsection of bankruptcy law added in 2005 related to coordinating the affairs of an American branch of a company involved in a bankruptcy or liquidation proceeding in a foreign country.

Chapter 20

A nickname given by bankruptcy practitioners to a two-step process, typically using Chapter 7 followed by Chapter 13, to eliminate or reorganize more debt or save property which might otherwise be lost in a single-step proceeding.

Claim

A very broad, inclusive term for a right to payment on a debt. A claim can be contingent on future events occurring, for as-yet-undetermined amounts, or subject to serious dispute.

A “claim” may refer to the right to seek a recovery for a wrong or an injury done as well.

Bankruptcy professionals also often refer to a creditor filing a “claim” in a bankruptcy case, typically meaning the filing of a document called a “proof of claim.”

Collateral

The property pledged for repayment of a debt. A ‘pledge’ or granting of a lien on collateral can happen through a mortgage, a car loan agreement, or simply through the use of certain types of credit cards. Or it can be done involuntarily by operation of law or from a party taking a judgment in court which becomes a lien on property.

Collateral Estoppel

A legal principle which prevents a party to a legal proceeding from re-arguing issues already decided by a court. Similar to “res judicata.”

Confirmation

A court proceeding which approves a reorganization plan under Chapter 11, 12, or 13. A ‘confirmed’ plan binds all parties to it including the debtor and creditors, whether or not they consent. Disobeying an order confirming a plan can result in a contempt of court proceeding.

Conversion

In bankruptcy, the transfer of a case from a proceeding under one Chapter to a proceeding under another Chapter, sometimes as a matter of right and sometimes allowed only with the court’s permission.

Can also refer to the taking of someone else’s property for one’s own use without the consent of the rightful owner (i.e. theft).

Cramdown

In consumer bankruptcy cases, the process of reducing the payment to which a secured creditor is entitled, typically to the fair market value of its collateral.  In Chapter 11 cases, it can also refer to getting court approval without the consent of certain creditors.

Creditor

A party owed money by a debtor. This can be almost anyone who is owed money or has a potential right to recover money from the debtor, including banks, government agencies, individual people, anyone.

Credit Card

A tool for accessing a credit line provided by a creditor either at a point of sale or through other electronic connection. Usually — but not always — the debt created by this borrowing is unsecured.

Credit Report

A compilation of information about a consumer about their use of consumer credit to be used typically by those considering the extension of credit to the consumer, or a few other approved uses (i.e. employment and collection purposes). Reports are maintained by credit reporting agencies, the best-known being Equifax, Experian, TransUnion, and the “checking account” credit reporting agency, Chex Systems.

A free copy of your credit report must be provided on demand to a consumer once per year, for example through the Annual Credit Report website.

Current Monthly Income

A bankruptcy debtor’s average gross income, based on the last six completed months, including certain contributions from third-parties but excluding certain types of income like Social Security benefits.

Debtor

A party who owes or is alleged to owe money to another.

The term also refers to a person or entity who is in a bankruptcy case. It was adopted into bankruptcy law in 1978 to eliminate the use of the more negative word “bankrupt” to describe someone who has needed relief from debts in such cases.

Debtor-in-Possession

A debtor in a Chapter 11 proceeding who remains in control of the property of the estate, so long as the bankruptcy court has not appointed a trustee to assume control. A debtor-in-possession has many of the powers and obligations of a trustee, most importantly to put the interests of creditors ahead of those who run or invested in the debtor.

Default

Sometimes called a “breach of contract,” a default is a failure to perform an obligation under a contract. A default under a contract does not have to be intentional. Federal and state law sometimes limit the rights of another party to declare the other party in “default” and the contracts themselves sometimes provide for methods and costs of curing a default once it has occurred.

Deficiency

The amount still owed on a loan after application of the proceeds from the sale of any collateral that originally secured the loan.

Discharge

A bankruptcy court order which eliminates the legal obligation to repay an obligation. A person who has received a bankruptcy discharge of debt is shielded from any attempt to collect it from him or her but may choose to voluntarily repay a debt.

What debts may or may not be discharged depends on your situation and the type of bankruptcy relief you pursue.

Disclosure Statement

A detailed analysis of a Chapter 11 debtor’s financial situation and outline of the proposed plan of reorganization.

Dismissal/Dismissed

The termination of a case. In a bankruptcy case, this is normally without benefit of a discharge to the debtor.

Disposable Monthly Income

The theoretical amount of money available each month from the debtor’s budget available to repay general, unsecured creditors in a Chapter 13 proceeding after deduction of allowed expenses, secured and priority debt payment from current monthly income.

Domestic Support Obligatory

An amount owed to a spouse, former spouse, or dependent under a family court order. Typically alimony, maintenance, and child support.

Effective Date

The day on which a reorganization plan becomes binding upon all parties, including the debtor and creditors as well as the day on which certain assets may be valued by the court to determine the amount of some secured claims.

Exemption

The amount of equity in real or personal property a state or the federal government allows a consumer to protect from levy or seizure by creditors.

FICO

Fair Issac Corporation. A “FICO Score” is the most commonly-recognized credit rating, a number calculated using a secret formula based on a consumer’s credit reports used by potential lenders to determine the degree of risk associated with lending to a particular consumer.

Fiduciary

A party legally obligated to care for the financial affairs of another and required to place the other party’s interests ahead of their own.

Foreclosure

The act whereby a secured lender converts a lien on collateral into an ownership, to the exclusion of the current owner who owed the debt. Typically refers to real property, that is, land or improvements to land, like homes, condominiums, and the like.

Fraud

The deliberate use of misleading or false information or tactics to obtain another’s property or money.

Garnishment

A judicial process for seizing another’s financial property, like wages or bank accounts, to pay a creditor’s judgment or, in some cases, child support or tax obligations.

Good Faith

The state of possessing an honest intention to act fairly and forthrightly with another party.

Homestead

The exemption provided, if any, to equity in a person’s home, most commonly the physical structure and real estate associated with it but sometimes refers to a mobile home or lease interest in property.

Involuntary Bankruptcy

A rarely used proceeding where creditors of a debtor join together to petition the bankruptcy court to determining the debtor is not paying its debts as they come due in order to allow the court to take control of the debtor’s property for the benefit of creditors.

Judgment

A court order determining an issue, most commonly determining if one party owes another a sum of money, any interest, or costs associated with the debt.

Lien

A right a party can grant to a creditor in property they have or are acquiring which secures — protects — the creditor’s right to payment. A default in the payment arrangements will typically give rise to the creditor’s right to take possession of the property and sell it to collect their obligation.

Liquidated

A fixed or relatively easily calculated amount.  Typically, this means an obligation amount that is either known or can be determined by a fixed formula, even if disputed.

Meeting of Creditors

The initial hearing in a bankruptcy case which is attended by the debtor (and lawyer), any trustee appointed in the case, and creditors who wish to attend. An opportunity for the parties to a case to ask the debtor questions about their financial condition, income, assets, liabilities, and past transactions. Also referred to as a 341 Meeting.

No-Asset

The typical status of a Chapter 7 consumer bankruptcy, it refers to the fact that the trustee has discovered no property or transfers of or from the debtor worth selling or recovering to pay the claims of creditors.

Non-dischargeable

The status of some debts which are not subject to a bankruptcy discharge either by operation of law (e.g. child support obligations) or because of a ruling by the court (e.g. debts incurred through fraud) during an adversary proceeding.

Oversecured

A creditor who holds a lien on property which is worth more than the debt they are owed.

Payday Loan

A short-term very high interest loan, typically made on the security of a post-dated check most commonly to be repaid on or near the next payday.

Perfection

The public recording of a lien by a secured creditor, like recording a mortgage with the deed’s office or placing a lien on a car title.  Perfection puts the public at large on notice of the creditor’s rights in property.

Personal Property

A party’s non-real estate assets.  Also called “personalty.”  Includes all tangible non-real estate things and sometimes includes intangible rights, like copyrights and patents.

Petition

The document used to open a bankruptcy case and seek the protection of the bankruptcy court and relief from the immediate payment of debts.

Preference

The repayment of a debt to the exclusion of or in a more advantageous way than the repayment of other obligations. Certain preferential payments or transfers can be recovered by the bankruptcy estate for repayment of all creditors.

Pre-petition

Events occurring prior to the filing of a petition, a request for relief from creditors, in bankruptcy.

Presumption of Abuse

The status that arises if a Chapter 7 debtor appears to “fail” the means test. It arises where a debtor appears to have disposable monthly income in excess of amounts allowed by law. See also 707(b) and abuse.

Priority

The system of determining in which order creditors are repaid from the estate. Certain creditors are granted favored treatment to partial or complete repayment prior to payment of lower “priority” claims. These are things like, the trustee’s commission, domestic support obligations, many taxes, consumer deposits, and so on.

Proof of Claim

A document that is normally filed by a creditor identifying the amount owed by the debtor, the type and priority of the debt, and any evidence supporting the alleged right to payment.

Reaffirmations

A complex written transaction where a debtor, normally in Chapter 7, agrees to remain personally responsible for a debt which may otherwise be discharged at the conclusion of the case. Such agreements require the consent of the creditor, and sometimes the agreement of the debtor’s lawyer and/or the bankruptcy court.

Redemption

The satisfaction of a secured creditor’s lien on the debtor’s personal property through a lump sum payment of the fair market value of the collateral in lieu of surrendering the collateral itself to the creditor.

Relief from Stay

Permission granted to a creditor to proceed with an act which might otherwise violate the automatic stay created at the beginning of a bankruptcy case. It is normally granted by the court only upon motion and hearing, upon a showing of good cause based on the bankruptcy law. It is granted automatically after certain time periods elapse or at the conclusion of a case by discharge, dismissal or closing without discharge.

Repossession

The act of a lender on personal property taking control and possession of collateral for the purpose of selling it to recover part or all of the debt owed.

Schedules

The lists of assets, liabilities, income, expenses, and recent transactional history of the debtor in a bankruptcy case. Typically filed in the case at or near the beginning of the case and maintained as a public record by the court.

Secured

To be possessed of a right to share in the proceeds of the sale of an asset prior to the original owner due to a debt owed by the owner.

Security Agreement

A contract term by which a debtor grants a creditor right to receive payment from the sale of certain collateral and typically giving the creditor the right to take and sell that collateral upon failure to perform some part of the contract.

Setoff

The act by which a creditor applies any obligation it owes to a debtor on one transaction to satisfy in whole or part an obligation the debtor owes to the creditor in another transaction.

Signature Loan

A debt owed by a party to another which is not secured by any collateral other than the party’s promise to pay. Also see unsecured.

Summons

A court notice which advises a party that a court proceeding is occurring, a hearing may be scheduled and certain rights of the party may be adjudicated.

Subpoena

A court order compelling a party to appear and give evidence in a court proceeding and/or produce records or allow them to be examined.

Title Loan

A debt typically secured by possession of the certificate title to a motor vehicle.

Trustee

A private party appointed most commonly by the U.S. Trustee (or Bankruptcy Administrator, in North Carolina and Alabama) to oversee a bankruptcy proceeding. A trustee can also be elected by creditors. Trustees are responsible for collecting or recovering the property of the estate and liquidating it, then distributing it to creditors and accounting to the court.

Unsecured

A creditor who holds a lien on property which is worth less than the amount owed to the creditor.

Undue Hardship

A burden which is unreasonably harsh under the circumstances, for example resulting in a debtor being unable to maintain a minimal standard of living for which the debtor should not be held responsible.

U.S. Trustee

A division of the federal Department of Justice which acts as a watch dog over the integrity of the bankruptcy system. It appoints most trustees, and is responsible for pursuing 707(b) actions, and selecting cases for audit.