Important Bankruptcy Terms
Bankruptcy lawyers, judges, and trustees sometimes seem to be speaking a different language. There are many “terms of art” that you need to know to be able to understand what’s going on in your case. Here are some of the more common terms you’ll hear:
Arrearages: What you’re behind on in making payments. If your monthly mortgage payment is $1,500, and you’re three payments behind, your arrearages are $4,500. In the bankruptcy context, arrearages usually apply only to secured creditors.
Assets: Things that you own or have a legal interest in that have value. Your house, car, bank accounts, cash, household goods and furnishings, are all considered assets, even if you owe money on them or are making payments on them.
Automatic Stay: As soon as a bankruptcy is filed, the Bankruptcy Code immediately stays, or stops, all collection actions against you. This means that foreclosures, garnishments, attachments, lawsuits, collection calls and letters, and even regular monthly bills are stopped.
Bankruptcy Petition: Legal papers filed with the Court that start a bankruptcy case.
Chapter 7: In a Chapter 7 bankruptcy case, a Debtor’s unsecured debts (usually credit cards, medical bills and personal loans) are wiped out. Most people can keep their home, car and all of their belongings, but if you can’t bring your mortgage or car payments current quickly, you may lose your house or car.
Chapter 11: The Chapter of the Bankruptcy Code that deals with business reorganizations and individual reorganizations of people who have too much debt to qualify for Chapter 13 or need the special provisions of Chapter 11. The Small Business Reorganization Act makes it easier for small businesses to get Chapter 11 Plans approved by the Court.
Chapter 11 Plan: A reorganization Plan filed with the Court to repay your creditors some or all of the money you owe. This is approved by the Court at a Confirmation Hearing.
Chapter 12: Chapter 12 is a type of bankruptcy offering special protections for family farmers and fishermen.
Chapter 13: A typical Chapter 13 bankruptcy sets up a five year payment plan for your Debts. A Chapter 13 usually saves your home and car, and you keep everything you have. You need to restart your regular monthly mortgage and car payments after the case is filed.
Chapter 13 Plan: When you file for Chapter 13, you propose a plan to the Court to repay your creditors some or all of the money you owe. This is the Chapter 13 Plan, which is approved by the Court at the Chapter 13 Confirmation Hearing.
Claim: In bankruptcy cases, a Creditor, someone you owe money to, files a Proof of Claim to tell the Court how much you owe them.
Collateral: Property that is security for a loan. An example is a car loan—if you don’t make the monthly payments, they can repossess the car, because the car is collateral for the loan.
Confirmation Hearing: In a Chapter 13 case, this is a Court hearing for the Judge to approve your Chapter 13 Plan. In many cases, it is not necessary for you to appear for this hearing; we work things out in advance with the Chapter 13 Trustee. In a Chapter 11 case, it is necessary for you to appear for this hearing.
Credit Counseling: You are required to take a brief credit counseling “course” before your case can be filed,and a second financial management course before you receive your discharge. Each course normally takes 45 - 90 minutes to complete, and can be done by phone or over the internet. We will let you know where and when to take the course.
Creditor: Someone you owe money to.
Debtor: What the Court calls someone who files for bankruptcy.
Debts: Money you owe.
Discharge: The legal term for wiping out your debt through bankruptcy. When a debt is discharged, it cannot be legally collected, although a lien that secures the debt is not automatically wiped out.
Equity: If an asset of yours would sell for more than it would cost to pay any Liens and the costs of sale, it probably has Equity. For example, if your car would sell for $10,000, you have a car loan of $8,000, and it would cost $1,000 to sell the car, you have $1,000 in Equity. Most household goods and furnishings and clothing, since they bring in very little if sold, have little Equity. See Liquidation Value.
Executory Contract: A contract that hasn’t been fully completed yet. Typical examples are leases (both residential and car), timeshares, real estate listing agreements, health club memberships, and home improvement contracts that haven’t been finished.
Exemptions: Each state has different lists of assets you can keep in bankruptcy. These are called “Exemptions.” In a Chapter 7 case, you generally need to exempt assets that have Equity in them to keep them. Read my Blog on Exemptions, “What Are Exemptions (or What Can i Keep in Bankruptcy)”.
Foreclosure: When your home is sold because you get behind on your mortgage. Chapter 13 and Chapter 11 are designed to let you catch up on your mortgage payments and let you save your home from foreclosure.
Lien: The legal document that lets a Creditor use Collateral for a loan. A car loan is a lien on the car, and a mortgage is a lien on a house. In some cases, you can reduce or eliminate a lien in bankruptcy. If you don’t, the lien is not discharged by the bankruptcy.
Liquidation Value: The dollar amount of what you can actually get for something. It is not necessarily the sale price and is not the replacement value. In the case of used clothing or household goods, it is what the item would sell for at a yard sale. In the case of a house, it’s market value LESS costs of sale (real estate commissions, closing costs, etc.) In the case of a bank account, it’s the money in the account. In the case of jewelry, it’s what you could get if you actually sold it—what a jewelry or pawn show would pay you for the item.
Non-Dischargeable Debt: Debt that cannot be discharged through a bankruptcy. Non-dischargeable debts can be enforced by the creditor after the bankruptcy case is over. Some examples of non-dischargeable debts are alimony, child support, student loans (in most cases) and taxes (in some cases, depending on how old they are).
Means Test: In 2005, Congress added the "Means Test" to Chapters 7 and Chapter 13. This is a supposedly objective test to determine whether someone can repay about 10-15% of their debts in a Chapter 13, and determine the amount of the Chapter 13 Plan payment. It doesn't work, no one (not judges, Trustees, or Debtor's attorneys) like it, but it is the law and we need to fill it out in every case. If you don't "pass" the Means Test and can't show "special circumstances," such as a recent or pretty certain change in income, you can't file a Chapter 7.
Meeting of Creditors: A hearing all Debtors are required to attend, usually scheduled 4-6 weeks after a case is filed. A better name for this hearing (which is also called the “341 Meeting”) would be the Trustee‘s Meeting, since creditors very rarely appear. Most 341’s last 3-5 minutes, and consist of the Trustee verifying you are who you say you are, asking a series of standard questions, and going into detail about anything unusual that appears on your Schedules. It really isn't as bad as it sounds. Here is Brett talking about the Meeting of Creditors:
Motion for Relief from the Automatic Stay/Motion to Lift Stay: If you don't stay current on your mortgage, car loan, or other secured debt after you file your bankruptcy case, the lender can file a Motion for Relief from the Automatic Stay, asking the Court to lift the automatic stay protections that went into effect when your case was filed so that it can foreclose on or repossess the collateral for the loan.
Personal Property: Everything that isn’t real estate—cars, cash, furniture, etc.
Petition: The document that, when filed with the Bankruptcy Court, starts the bankruptcy case. Events that happen before the Petition is filed are called “Pre-Petition,” and events that happen after the Petition is filed are called “Post-Petition.”
Priority Debt: A debt that has to be paid in full or it is not discharged in bankruptcy. Some taxes and domestic support obligations are typical priority debts. Priority debts are not dischargeable unless they are paid in full.
Proof of Claim: The document that creditors file with the Bankruptcy Court stating how much the creditor is owed. If a creditor doesn’t file a Proof of Claim, it generally doesn’t get paid through the bankruptcy.
Reaffirmation Agreement: An agreement, usually with your auto lender, treating your car loan as if you never filed for bankruptcy.
Schedules: The documents filed with your Bankruptcy Petition that list your assets, debts, income and expenses. Schedule A/B lists Real and Personal Property, Schedule C lists your Exemptions, Schedule D lists Secured Debt, Schedule E/F lists Priority Debt and General Unsecured Debt, Schedule G lists Executory Contracts, Schedule H lists Co-Debtors, Schedule I lists Monthly Income, and Schedule J lists Monthly Expenses.
Secured Creditor: A Creditor whose loan is secured by collateral. Another way of putting it is that the loan is a lien on the collateral. If you don’t pay, the Creditor can take the collateral. Most mortgages and car loans are Secured, because if you don’t make the payments, they can foreclose on the house or repossess the car.
Statute of Limitations: A law that set the deadline or maximum period of time within which a lawsuit or claim may be filed.
Trustee: In a Chapter 7 case, the Trustee is the person who conducts the Meeting of Creditors and is responsible for recovering any assets that aren’t Exempt. In a Chapter 13 case, in addition to conducting the Meeting of Creditors, the Trustee receives payments under the Chapter 13 Plan and pays your creditors. The United States Trustee oversees the whole process, and usually gets involved in a consumer case only if there are questions about eligibility or an appearance of abuse. In a Chapter 11 case, a Trustee can be the Small Business Reorganization Act administrator or appointed by the Court for abuse.
Unsecured Creditor: A Creditor whose loan isn’t secured by collateral. Most credit cards, medical bills and personal loans are Unsecured.