Bankruptcy is a highly complex process, and many filers may be unfamiliar with the terminology in their case. Because every detail matters, it is crucial to understand the necessary documents and what the court expects from you during the case. Below is a list of bankruptcy terms you should know before filing.
Adversary Proceeding
A lawsuit associated with a bankruptcy case is called an adversary proceeding. Generally, these lawsuits are handled separately from the bankruptcy case but are related to an issue that may arise during the liquidation of assets or reorganization of an estate.
Automatic Stay
When someone files for bankruptcy, it triggers an automatic stay or injunction that stops lawsuits, garnishments, foreclosures, and any other kind of collection activity the debtor may face. Once an automatic stay is in place, creditors and collectors may not pursue debt collection.
Bankruptcy Code
The basis of bankruptcy law is the Bankruptcy Code or title 11 of the United States Code of federal law. This code establishes the legal process for bankruptcy.
Bankruptcy Petition
The document filed by the debtor or creditor to open a bankruptcy case is called a petition. Bankruptcy petitions can be filed by the debtor voluntarily or involuntarily by the creditor in some cases.
Chapter 7
Also known as liquidation, Chapter 7 is a type of bankruptcy that grants a court-appointed trustee the power to liquidate unprotected assets to pay off debt. During Chapter 7, the debtor’s assets are put into two groups: exempt and nonexempt. Exempt property will not be liquidated.
Chapter 13
Individuals may file for Chapter 13 bankruptcy, also known as reorganization. Under this type of bankruptcy, the filer may keep their assets, but they must create a repayment plan that will allow them to pay off their debts over three or five years.
Consumer Debt/Debtor
Consumer debts are incurred for personal needs, not business expenses. Those who have consumer debt are called consumer debtors.
Contingent Claim
In some bankruptcy cases, a claim may be made that the debtor owes another party under unique circumstances. For example, the debtor may be a cosigner on another person’s loan and liable for their payments. The bankruptcy court will evaluate the claim and handle it appropriately.
Current Monthly Income
The court defines current monthly income as the average income per month earned by the debtor over six calendar months before the beginning of the bankruptcy case. The average income would include contributions to household expenses and income from the debtor’s spouse if they filed a joint bankruptcy petition. Monthly income does not include social security or veterans benefits.
Discharge
The goal of a bankruptcy case is debt discharge – the release of personal liability for some debts. Once a debt is discharged, creditors cannot pursue collection or contact the debtor regarding discharged debts.
Dischargeable Debts
Only debts dischargeable under the Bankruptcy Code can be discharged. Student loans, family support payments, and some taxes are typically not dischargeable.
Executory Contract/Lease
Contracts or leases where both parties have duties to perform are considered executory during bankruptcy.
Insider (of Individual Debtor)
Relatives of the debtor or general partners are insiders, according to the court.
Joint Administration
The bankruptcy court may administer two or more bankruptcy cases together if there are no conflicts of interest, and both parties can pool their resources.
Lien
A claim or legal right against assets that are typically used as collateral to satisfy a debt.
Means Test
One of the steps in the Chapter 7 bankruptcy process is a means test to determine whether the debtor qualifies for Chapter 7. If the debtor fails the means test, they may still file for Chapter 13.
Objection to Dischargeability
A trustee or creditor may object to the debtor’s release from personal liability for some debts. This can happen if there are allegations that the debt was incurred fraudulently.
Party in Interest
The trustee, debtor, administrator, and creditors may be parties in interest during a bankruptcy case.
Preferential Debt Payment
All payments made to the creditor 90 days before filing for bankruptcy are considered a preferential debt payment.
Priority Claim
These claims are paid before other unsecured claims giving them priority status.
Reaffirmation Agreement
A debtor may agree to continue paying a dischargeable debt after bankruptcy to keep collateral. This only can happen with car loans or homes not attached to land since SC judges will not approve a mortgage reaffirmation.
Secured Debt
Debts backed by mortgages, collateral, liens, or other means are secured.
341 Meeting
Creditors meet during the bankruptcy case to question the debtor under oath. In some cases, this is called a creditors’ meeting.
