Definitions of Common Bankruptcy and Legal Terms
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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 a debtor 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 have a $6,000 arrearage, or, in
other words, you are $6,000 in arrears.
asset: 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. Tangible assets are generally of
two kinds, real property, which includes any land, residences, or buildings,
and personal property which includes automobiles, household furnishings, art
collections, clothing, jewelry, boats, airplanes, and similar tangible
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
("BAPCPA"): The name (mis-name) given by Congress to the new
bankruptcy law legislation passed and signed into law by President Bush,
effective October 17, 2005, which was designed to dramatically changed the way
eligibility for filing bankruptcy was determined. It was designed neither to
address actual bankruptcy abuse nor to protect consumers.
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. Sections 101-1330), the federal bankruptcy
bankruptcy court: The bankruptcy judges in regular
active service in each district; a unit of the United States District Court.
bankruptcy estate: All legal or equitable interests
of the debtor in property at the time of the bankruptcy filing. (The bankruptcy
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) that 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: The 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: 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 consumer credit counseling class, or an "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 ("CMI"): 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 non-debtors 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. Section
debt: Liability on a claim.
debtor: A person who has filed a petition for relief
under the Bankruptcy Code.
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.
debtor education: See: credit counseling.
debt relief agency: A debt relief agency is a made-up
designation that our Congress created as part of the 2005 Bankruptcy Reform Act
(BAPCPA) 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.
defendant: An individual (or business) against whom
a lawsuit is filed.
denial of discharge: A creditor, trustee, U.S.
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, the 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 monthly income ("DMI"): 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 ("DSO"): 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. (For 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 (or if
multiple states have been lived in in the past 2 years, there is a formula for
deciding which state's law applies).
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 ("GUC"): 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. Section 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: A single 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. Even if the amount is not known, it is liquidated if it is
"readily capable" of being determined.
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) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as
that amount is at least $6,000. 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 (for relief from) 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
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 (“BAPCPA”).
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 debts for alimony or child support
(DSO's), 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. Plans
are required in Chapter 13 and Chapter 11 cases (also in Chapter 9 and 12).
plaintiff: A person or business that files a formal
complaint with the court.
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 before the commencement of a
post-petition: Occurring after the commencement of a
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 pre-petition alimony and/or child support must be paid in full
before any general unsecured debt (i.e. trade debt or credit card debt) is
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
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. a car) that
would otherwise be subject to repossession. In order to be valid, the
reaffirmation agreement must be signed and filed with the court prior to the
discharge being entered.
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 because 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.)
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 the creditors' meeting.
transfer: Any mode or means by which a debtor
disposes of or parts with his/her property or assets.
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
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
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.