Bankruptcy terms are often very confusing. It is like learning a foreign language. Here are brief definitions of many terms used in this site and in the Bankruptcy Code. It is our hope this glossary will help you to better understand the bankruptcy process.
Adversary proceeding: A lawsuit filed in the bankruptcy court that 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.
Automatic stay: The injunction issued automatically upon the filing of a bankruptcy case that 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) some 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 made prior to the filing of the bankruptcy case. This power allows the trustee to recover assets that seized, transferred or sold prior to the filing of the bankruptcy. Either the Bankruptcy Judge or the Trustee will then sell the assets at a public auction and use the funds from the sale of those assets to pay creditors in the bankruptcy.
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. In other words, if a garnishment, trustee’s sale or repossession is about to take place (all state actions), then a bankruptcy (federal law) will stop those actions for some period of time.
Bankruptcy estate: The estate is all of the legal and equitable interests of the debtor as of the date the bankruptcy case was filed with the Court. From the estate, an individual debtor can claim certain property exempt; the balance of the estate is liquidated by the Chapter 7 Trustee and used to pay the administrative costs of the proceeding and the claims of creditors according to their priority.
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 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 debtor will pay the claims of creditors in whole or in part.
Chapter 12: A simplified reorganization plan for family farmers and fishermen, whose debts fall within certain limits.
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.
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 creditors. The rule with respect to liens is “First in time, first in right.”
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 control over all pre-existing contracts or obligations as between the debtor and creditor.
Conversion: Bankruptcy cases 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.
Creditor: The person or organization to whom the debtor owes money or some other form of legal obligation.
Cramdown: If the creditors do not approve a plan of reorganization, the court may still approve it, if the bankruptcy judge believes it is in the best interest of all parties. Normally a cramdown involves reducing a secured creditor’s debt to the fair market value of the property, with the balance of the debt determined to be unsecured.
Debtor: The debtor is the entity (person, partnership or corporation) who is liable for debts, and who has filed for bankruptcy protection.
Debtor in Possession: In a Chapter 11 case, the debtor usually remains in possession 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.
Denial of discharge: If the Debtor commits bankruptcy fraud, or fraud on its creditors as a whole, then the Debtor can be denied a discharge. 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 continue for the benefit of creditors.
Discharge: A discharged debt is one that the creditor cannot make a demand for payment. If they do that creditor is in contempt of the federal restraining order and can be fined for its intentional conduct. Unless the court has determined otherwise, the secured creditor can still enforce on its lien against its collateral (such as cars and homes).
Dischargeable: Debts that can be discharged in bankruptcy. Certain debts are not dischargeable in a chapter 7 bankruptcy, but may be in a chapter 13 (such as fraud). Some debts cannot be discharged at all – such as child support, criminal restitution, and some student loans.
Dismissal: The termination of the case. If a case is dismissed then the debtor and the creditors have the same rights and remedies as they had before the bankruptcy case was filed.
Docket: A formal record of all action pending before the court in one matter. These actions are assigned consecutive filed numbers. The bankruptcy docket includes all pleadings, minute entries, orders and any other document filed in the particular case. The docket numbers are usually electronically linked to the referenced document.
Electronic Case Filing: CM/ECF is the federal courts’ case management and electronic case files system. It provides courts enhanced and updated docket management. It allows courts to maintain case documents in electronic form. And it gives each court the option of permitting case documents — pleadings, motions, petitions — to be filed with the court over the Internet. CM/ECF implementation in the bankruptcy courts has been underway since early 2001. District court implementation began in 2002. Appellate court implementation began in late 2004.
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 types of property that is protected by law from your creditors, and the bankruptcy Trustee. Each state has its own list of exempt property. There is also a list of exempt property under federal statutes. The types and values of exempt property differ greatly from state to state.
Fiduciary: A person or entity who is entrusted with duties on behalf of another, (such as an attorney or a person with power of attorney). The law requires the highest level of good faith, loyalty and diligence from a fiduciary. This duty is higher than the common duty of care that we all owe to each other.
General, unsecured claim: Claims (debts) that do not fall into the administrative or secured category. Usually, credit cards, medical bills and personal loans are general, unsecured claims. If the bankruptcy has funds, after paying administrative and priority claims, then unsecured claims will receive a pro-rata payment. For example – all general unsecured may receive 10 percent of the entire amount of their debt.
Lien: An interest in real or personal property that secured a debt; the lien may be voluntary, such as a deed of trust on land, 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 not known. Tort claims (such as personal injury lawsuits) are usually unliquidated until a trial fixes the amount of the liability of the person being sued.
Non dischargeable: A debt that cannot be eliminated in bankruptcy (such as child support and most student loans). Non-dischargeable debts remain legally enforceable despite the bankruptcy discharge. The Code’s list of non dischargeable debts is found at 11 U.S.C. 523.
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 deed of trust is perfected upon execution and delivery of the Deed to the Buyer; filing a financing statement with the secretary of state perfects a lien in personal property. 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. The trustee can avoid an unperfected lien.
Personal property: Property that is not land (real property) or affixed to land. Personal property includes 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“. That means the event happened before the bankruptcy petition was filed, and “post petition”, after the bankruptcy was filed.
Preference: A transfer to a creditor in payment of an existing debt made within certain time periods before the commencement of the case (anywhere from one year to 3 months prior to filing the bankruptcy). The Trustee may recover preferences for the benefit of all creditors of the estate. Therefore, if a friend or relative is paid and not other creditors, the Trustee can demand that the friend or relative return all funds received within on year prior to filing the bankruptcy.
Pre-petition: The time before filing a bankruptcy. Usually, the only debts affected by a bankruptcy are those owed pre-petition. There are some exceptions for chapter 11, 12 and 13.
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 (such as attorney and CPA fees), 2) priority claims (such as IRS) and 3) general unsecured claims (such as credit cards). Secured claims are paid from the proceeds of liquidating the collateral that secured the claim (such as house or car).
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. Go to discussion of priority taxes.
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. The trustee usually sells property of the estate and the claims of creditors paid from the proceeds.
Reaffirm: The debtor can choose 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.
Relief from stay (also called motion for relief from the automatic 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 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.
Unsecured: A claim or debt is unsecured if there is no collateral that is security for the debt. Most consumer debts (credit cards, personal loans, doctor bills) are unsecured
Further definitions are found in Section 101 of the Bankruptcy Code.
To speak directly, one on one, with an experienced and knowledgeable Philadelphia Bankruptcy Lawyer, please contact me. I offer free initial consultations on all bankruptcy matters.