Bankruptcy Terms and Definitions
Bankruptcy has its own language. Here is a brief definition of some of those terms used in this site and in the Bankruptcy Code. This is by no means intended as a comprehensive or complete listing. However, we hope what is included may resolve, and clarify, some of the more common but still complex questions. Readers may also find the Frequently Asked Questions page helpful.
Adversary proceeding: A lawsuit filed in the bankruptcy court which is related to the debtor's bankruptcy case. Examples are complaints to determine the "dischargeability" of a debt and complaints to determine the extent and validity of liens.
Assets: Assets are every form of property that the debtor owns. They include such intangible things as business goodwill; the right to sue someone; or stock options. The debtor must disclose all of his assets in the bankruptcy schedules; exemptions remove the exempt assets from property of the estate.
Automatic stay: The injunction issued automatically upon the filing of a bankruptcy case which prohibits collection actions against the debtor, the debtor's property or the property of the estate.
Avoidance: The Bankruptcy Code permits the debtor to eliminate (avoid) certain kinds of liens that interfere with (or impair) an exemption claimed in the bankruptcy. Most judgment liens that have attached to the debtor's home can be avoided if the total of the liens (mortgages, judgment liens and statutory liens) is greater than the value of the property in which the exemption is claimed. This is sometimes called "lien stripping."
Avoidance powers: Rights given to the bankruptcy trustee or the debtor in possession to recover certain transfers of property such as preferences or fraudulent transfers. Or to void liens created before the commencement of a bankruptcy case.
Bankruptcy Code: Title 11 of the United States Code governs bankruptcy proceedings. Bankruptcy is a matter of federal law and is, with the exception of exemptions, the same in every state. When federal bankruptcy law conflicts with state law, federal law controls.
Bankruptcy Court United States bankruptcy courts are federal courts that have subject-matter jurisdiction over bankruptcy cases.
Bankruptcy Estate: The estate is all of the legal and equitable interests of the debtor as of the commencement of the case. From the estate, an individual debtor can claim certain property exempt; the balance of the estate is liquidated in a Chapter 7 to pay the administrative costs of the proceeding and the claims of creditors according to their priority.
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: A formal request for the protection of the federal bankruptcy laws.
Bankruptcy Trustee: A private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases to represent the interests of the bankruptcy estate and the debtor's creditors.
Business Bankruptcy: A bankruptcy case in which the debtor is a business or an individual involved in business and the debts are for business purposes.
Chapter 7: The most common form of bankruptcy, a Chapter 7 case, is a liquidation proceeding, available to individuals, married couples partnerships and corporations.
Chapter 7 Trustee: A person appointed in a chapter 7 case to represent the interests of the bankruptcy estate and the unsecured creditors. (The trustee's responsibilities include reviewing the debtor's petition and schedules, liquidating the property of the estate, and making distributions to creditors. The trustee may also bring actions against creditors or the debtor to recover property of the bankruptcy estate.)
Chapter 11: A reorganization proceeding in which the debtor may continue in business or in possession of its property as a fiduciary. A confirmed Chapter 11 plan provides for the manner in which the claims of creditors will be paid in whole or in part by the debtor.
Chapter 12: A simplified reorganization plan for family farmers whose debts fall within certain limits. Chapter 12 was not renewed when it expired this session of Congress.
Chapter 13: A repayment plan for individuals with debts falling below statutory levels which provides for repayment of some or all of the debts out of future income over 3 to 5 years.
Chapter 13: Trustee: A person appointed to administer a chapter 13 case. (A chapter 13 trustee's responsibilities are similar to those of a chapter 7 trustee; however, a chapter 13 trustee has the additional responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing plan payments to creditors.)
Claim: A creditor's assertion of a right to payment from a debtor or the debtor's property.
Collateral: The property which is subject to a lien. A creditor with rights in collateral is a secured creditor and has additional protections in the Bankruptcy Code for the claim secured by collateral. The measure of the secured claim is the value of the collateral available to secure the claim: it is possible to have a lien on property that is subject to a senior lien or liens such that the security available to pay the claim is really without value to the junior creditor. The general rule with respect to liens is "First in time, first in right."
Complaint: The first or initiatory document in a lawsuit that notifies the court and the defendant of the grounds claimed by the plaintiff for an award of money or other relief against the defendant.
Confirmation: The court order which makes the terms of the plan for repayment of debts in a Chapter 11, 12 or 13 binding. The terms of the confirmed plan replace the prepetition rights of the debtor and creditor.
Consumer Bankruptcy: A bankruptcy case filed to reduce or eliminate debts that are primarily consumer debts.
Consumer Debts: Debts incurred for personal, as opposed to business, needs.
Contingent: Used to describe debts that are not fixed in right at the time, but are dependent on some other event happening to fix the liability.
Current Monthly Income: "Current monthly income" is not what you are going to earn this month. Instead, it is your average monthly gross income from employment, bonuses, child support, family members' gifts, and any other income (except Social Security benefits) in the six months ending the month before you file bankruptcy.
Conversion: Cases under the Code may be converted from one chapter to another chapter. For example; a Chapter 7 case may be converted to a case under Chapter 13 if the debtor is eligible for Chapter 13. Even though the chapter of the Code which governs it changes, it remains the same case as originally filed.
Creditor: The person or organization to whom the debtor owes money or has some other form of legal obligation.
Debtor: The debtor is the entity (person, partnership or corporation) who is liable for debts, and who is the subject of a bankruptcy case.
Debtor in Possession: In a Chapter 11 case, the debtor usually remains in p ossession of its assets and assumes the duties of a trustee. The debtor in possession is a fiduciary for the creditors of the estate, and owes them the highest duty of care and loyalty.
Defendant: An individual (or business) against whom a lawsuit is filed.
Denial of discharge: Penalty for debtor misconduct with respect to the bankruptcy case or creditors as a whole. The grounds on which the debtor's discharge may be denied are found in 11 U.S.C. 727. When the debtor's discharge is denied, the debts that could have been discharged in that case cannot be discharged in any subsequent bankruptcy. The administration of the case, the liquidation of assets and the recovery of avoidable transfers, continues for the benefit of creditors.
Discharge: The legal elimination of debt through a bankruptcy case. When a debt is discharged, it is no longer legally enforceable against the debtor, though any lien which secures the debt may survive the bankruptcy case.
Dischargeable: Debts that can be eliminated in bankruptcy. Certain debts are not dischargeable; that is, they may not be discharged through bankruptcy or may only be discharged through Chapter 13. Family support and criminal restitution are examples of debts which cannot be discharged. Debts incurred by fraud can only be discharged in Chapter 13.
Dismissal: The termination of the case without either the entry of a discharge or a denial of discharge; after a case is dismissed, the debtor and the creditors have the same rights as they had before the bankruptcy case was commenced.
Domestic Support Obligation: Debts for alimony, maintenance or support owed to child, spouse or governmental entity that paid for the support of the 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 $60,000 is subject to a $30,000 mortgage, there is $30,000 of equity.)
Executory Contract or Lease: Generally includes contracts or leases under which both parties to the agreement have duties remaining to be per-formed. (If a contract or lease is executory, a debtor may assume it or reject it.)
Exempt: Property that is exempt is removed from the bankruptcy estate and is not available to pay the claims of creditors. The debtor selects the property to be exempted from the statutory lists of exemptions available under the law of his state. The debtor gets to keep exempt property for use in making a fresh start after bankruptcy.
Exemptions: Exemptions are lists of the kinds and values of property that is legally beyond the reach of creditors or the bankruptcy trustee. What property may be exempted is determined by state and federal statutes, and varies from state to state.
Fiduciary: One who is entrusted with duties on behalf of another. The law requires the highest level of good faith, loyalty and diligence of a fiduciary, higher than the common duty of care that we all owe one another. The debtor in possession in a Chapter 11 is a fiduciary for the creditors, owing loyalty to the creditors and not the shareholders of the debtor.
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 StartThe 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: Creditor's claim without a priority for payment for which the creditor holds no security (or collateral). If the available funds in the estate extend to payment of unsecured claims, the claims are paid in proportion to the size of the claim relative to the total of claims in the class of unsecured claims.
Lien: An interest in real or personal property which secures a debt; the lien may be voluntary, such as a mortgage in real property, or involuntary, such as a judgment lien or tax lien.
Liquidated: A debt that is for a known number of dollars is liquidated. An unliquidated debt is one where the debtor has liability, but the exact monetary measure of that liability is unknown. Tort claims are usually unliquidated until a trial fixes the amount of the liability of the tort feasor.
Liquidated Claim: A creditor's claim for a fixed amount of money.
Means Test: Added to the Bankruptcy Code in 2005, the means test is intended to screen out those filing Chapter 7 who are supposedly able to repay some part of their debts.
Meeting Of Creditors: The debtor(s) must appear at a meeting with the trustee to be examined under oath about assets and liabilities and the schedules that were filed.
Motion To Lift The Automatic Stay: A request by a creditor to allow the creditor to take an action against a debtor or the debtor's property that would otherwise be prohibited by the automatic stay.
Non dischargeable: A debt that cannot be eliminated in bankruptcy. Non dischargeable debts remain legally enforceable despite the bankruptcy discharge.
Objection to Discharge: A trustee's or creditor's objection to the debtor's being released from personal liability for certain dischargeable debts.
Objection to Exemption: A trustee's or creditor's objection to a debtor's attempt to claim certain property as exempt, i.e., not liable for any prepetition debt of the debtor.
Perfection: When a secured creditor has taken the required steps to perfect his lien, the lien is senior to any liens that arise after perfection. A mortgage is perfected by recording it with the county recorder; a lien in personal property is perfected by filing a financing statement with the secretary of state. An unperfected lien is valid between the debtor and the secured creditor, but may be behind liens created later in time, but perfected earlier than the lien in question. An unperfected lien can be avoided by the trustee.
Personal property: Property that is not real property or affixed to real property, such as cars, stock, furniture, etc.
Petition: The document that initiates a bankruptcy case. The filing of the petition constitutes an order for relief and institutes the automatic stay. Events are frequently described as "prepetition", happening before the bankruptcy petition was filed, and "post petition", after the bankruptcy.
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.
Postpetition Transfer: A transfer of a debtor's property made after the commencement of the case.
Pre-Bankruptcy Planning: The arrangement (or rearrangement) of a debtor's property to allow the debtor to take maximum advantage of exemptions. (Pre bankruptcy planning typically includes converting nonexempt assets into exempt assets.)
Preference: A transfer to a creditor in payment of an existing debt made within certain time periods before the commencement of the case. Preferences may be recovered by the trustee for the benefit of all creditors of the estate.
Pre-petition: Claims or events arising before the commencement of the bankruptcy case, that is, before the filing of the bankruptcy petition. Generally only pre-petition debts may be discharged in a bankruptcy proceeding.
Priority: The Bankruptcy Code establishes the order in which claims are paid from the bankruptcy estate. All claims in a higher priority must be paid in full before claims with a lower priority receive anything. All claims with the same priority share pro rata. Claims are paid in this order: 1) costs of administration 2) priority claims and 3) general unsecured claims. Secured claims are paid from the proceeds of liquidating the collateral which secured the claim.
Priority claims: Certain debts, such as unpaid wages, spousal or child support, and taxes are elevated in the payment hierarchy under the Code. Priority claims must be paid in full before general unsecured claims are paid.
Proof of claim: The form filed with the court establishing the creditor's claim against the debtor.
Property of the estate: The property that is not exempt and belongs to the bankruptcy estate. Property of the estate is usually sold by the trustee and the claims of creditors paid from the proceeds.
Reaffirm: The debtor can chose to reaffirm debts that would otherwise be discharged by the bankruptcy. Generally, when a debt is reaffirmed, the parties to the reaffirmed debt have the same rights and liabilities that each had prior to the bankruptcy filing: the debtor is obligated to pay and the creditor can sue or repossess if the debtor doesn't pay.
Redeem: Sometimes you can pay what your personal property is worth now, instead of what you owe on it, to a secured creditor. You can only redeem some types of personal items, but this is a powerful option when available. Imagine if you could pay a secured creditor the $500 you can prove your PC is worth now, instead of the $2,000 you still owe on it. To redeem property, your bankruptcy lawyer has to file a motion with the Court.
Relief from stay: A creditor can ask the judge to lift the automatic stay and permit some action against the debtor or the property of the estate. If the motion is granted, the moving party (but no one else) is free to take whatever action the court permits. Relief can be absolute, for example, permitting the creditor to foreclose on property, or limited, as for example, allowing the recordation of a notice of default.
Schedules: The debtor must file the required lists of assets and liabilities to commence a bankruptcy case, collectively called the Schedules.
Secured Creditor: An individual or business holding a claim against the debtor that is secured by a lien on property of the estate or that is subject to a right of setoff.
Secured debt: A claim secured by a lien in the debtor's property by reason of the debtor's agreement or an involuntary lien such as a judgment or tax lien. The creditor's claim may be divided into a secured claim, to the extent of the value of the collateral, and an unsecured claim equal to the remainder of the total debt. Generally a secured claim must be perfected under applicable state law to be treated as a secured claim in the 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.
Substantial Abuse: The characterization of a bankruptcy case filed by an individual whose debts are primarily consumer debts where the court finds that the granting of relief would be an abuse of chapter 7 because, for example, a debtor can pay their debts.
Trustee: the court appoints a Trustee in every Chapter 7 and Chapter 13 case to review the debtor's schedules and represent the interests of the creditors in the bankruptcy case. The role of the Trustee is different under the different chapters. Unsecured: A claim or debt is unsecured if there is no collateral that is security for the debt. Most consumer debts are unsecured.
Unliquidated Claim: A claim for which a specific value has not been determined.
Unsceduled Debt: A debt that should have been listed by a 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.