123 We know it’s hard to understand your choices when you don’t know the vocabulary; bankruptcy does have terminology that’s all its own. In this keyword glossary we highlight and define those words that are used most often in the bankruptcy realm.
If your bankruptcy attorney or your bankruptcy paperwork uses words you don’t understand, it’s perfectly okay to ask your lawyer what the words mean. Unless you deal with bankruptcy issues daily, no one understands everything without some help.
You’ll like this term. When your bankruptcy petition is accepted by the court, an order (called an “automatic stay”) is issued. This means that your creditors must stop trying to collect on your debts. Happily for debtors, the automatic stay puts an end to lawsuits, foreclosures, garnishments, letters, and phone calls.
Bankruptcy is federal protection for debtors authorized by the U.S. Constitution and put into law by Congress. Bankruptcy laws are found in the Unites States Code. (Chapter 11 of the U.S. Code is the Bankruptcy Code. 11 U.S.C. §§ 101-1330.)
Filing bankruptcy allows debts to be discharged and reorganized so that individuals, couples, and businesses can get a fresh financial start. It encourages hard work and recovery.
Your bankruptcy attorney will guide you in selecting which chapter of bankruptcy is appropriate and has the most benefits for you. A “chapter” refers to sections (aka “chapters) of the U.S. Bankruptcy Code.
Here’s a rundown on what bankruptcies are available.
- Chapter 7 for “lower” income, “low” asset individuals and married couples.
Many unsecured debts are discharged and all or many assets are protected by exemptions. If you don’t qualify for Chapter 7 or you have high non-dischargeable debt, Chapter 13 is an alternative.
- Chapter 9 for municipalities in financial distress.
- Chapter 11 for corporations and partnerships seeking reorganization.
- Chapter 12 for family farmers or family fishermen.
- Chapter 13 for individuals or married couples seeking debt adjustment.
Chapter 13 is commonly selected by folks who either don’t qualify for Chapter 7 or who have high non-dischargeable debt such as student loans, tax bills, personal injury settlement or verdict debts, criminal fines and restitution, alimony, and child support.
Debts are repaid over a three to five year plan.
- Chapter 15 for bankruptcies involving parties in more than one country.
A code is a collection of laws on a particular subject. The Bankruptcy Code contains all the federal bankruptcy laws and is found in Title 11 of the United States Code, 11 U.S.C. §§ 101-1330).
The Bankruptcy Code contains chapters you have likely heard of. Most individuals and married couples file bankruptcy under Chapter 7 of the Bankruptcy Code or Chapter 13 of the Bankruptcy Code.
Think of your bankruptcy petition as your application for bankruptcy. You need to use official bankruptcy forms and be 100% forthcoming and accurate.
- Only those debts listed on your petition can be discharged or renegotiated during bankruptcy.
- If you don’t follow the correct procedure, the bankruptcy court will reject your petition.
- The trustee will investigate to make sure your filings are truthful and complete.
Chapter 7 Bankruptcy
“Lower” income individuals and married couples often file for bankruptcy protection under Chapter 7; it’s sometimes called, “the liquidation bankruptcy” because “excess” assets can be sold to pay off creditors.
However, don’t let the terms “liquidation”, worry you, most folks filing under Chapter 7 lose no assets, unless they want to give them up so they don’t have to make payments. Most or all of your assets will, likely, be protected by your state or federal bankruptcy exemptions and federal (non-bankruptcy specific) exemptions.
In addition, a benefit of a Chapter 7 Bankruptcy is that many debts are discharged (i.e. forgiven) and it’s all over in 4 to 6 months.
Chapter 13 Bankruptcy
If folks don’t qualify for Chapter 7 because they’re income is too high or they prefer not to file under that chapter because they have high non-dischargeable debt, Chapter 13 is the likely option.
Under Chapter 13 some debts such as a second or third mortgage may be discharged because they’ve become unsecured and others may be reorganized, meaning that you may be permitted to pay back less with more favorable terms.
The payback period is stretched out over 3 to 5 years, which makes repayment much easier than under Chapter 7, which has no stretch out , but the final discharge takes longer (3 to 5 years). You’ll need to show the court that you do have regular income and can fulfill the payment plan.
Non-business debt is consumer debt and includes goods purchased on credit and consumed or subject to depreciation.
- Credit card debt and car loans are common examples of consumer debt.
- A mortgage is not consumer debt even though it’s for personal use.
A creditor is an individual or business to whom you owe money. Bankruptcy is filed to seek protection from creditors who are trying to collect on a debt you are unable to pay.
Credit Counseling (aka “Debtor Education”)
Most Chapter 7 and Chapter 13 filers are required to take an online credit counseling class so the likelihood of repeat financial mistakes are lessened.
Creditors’ Meeting (aka “341 Meeting)
A required meeting, during which, you and your bankruptcy attorney meet with the bankruptcy trustee. Creditors, who object to your bankruptcy petition, can attend and voice their objections, but that’s unusual.
- Most institutional creditors such as credit card companies or hospitals won’t file any objections.
- If someone you know personally wants to object to your petition, usually a letter is written to the trustee.
- Do not mess with your ex-spouse, friend, business partner, or relative.
- Be 100% honest and forthcoming on your bankruptcy petition.
Current Monthly Income
If you want to file bankruptcy under Chapter 7, your income (and expenses) determines whether you qualify. If you don’t immediately qualify, but Chapter 7 would be in your best interests, your bankruptcy attorney may have you wait to file your petition. Waiting often works well if there has been a job loss or an illness creating the inability to work.
In general, and with some exceptions, your household income, averaged over the 6 months, immediately preceding bankruptcy is considered. (See 11 U.S.C. § 101(10A)).
For many reasons, the timing of your bankruptcy filing is key, be sure to consult with a qualified bankruptcy lawyer before filing.
The debtor owes money to creditors that he or she cannot repay; bankruptcy protects debtors from creditor attempts to collect on those debts.
A discharge is good news for debtors who can’t repay their debt. In bankruptcy, certain debts are discharged, meaning that they never have to be repaid.
Creditors are forbidden from attempting to collect on any debts that have been discharged. This means an end to nasty phone calls, letters, lawsuits, and garnishments.
Equity refers to the value of your property that you actually own.
- If your house has a fair market value of $100,000 and your mortgage is $80,000, your equity is the difference between the two. $100,000 – $80,000 = $20,000.
- If your car has a fair market value of $15,000 and your car loan is $14,000, your equity is the difference between the two. $15,000 – $14,000 = $1,000.
Equity is very important, especially in a Chapter 7 bankruptcy, which protects certain property up to the exemption amount. You can keep all of your property so long as an exemption covers your equity. We’ll discuss “exemptions” next.
Federal and state laws exempt certain property from seizure during the bankruptcy process. If your property is exempted, it cannot be taken from you and sold.
Bankruptcy exemptions vary greatly from state to state and in some states you’re permitted to choose between federal bankruptcy exemptions and state bankruptcy exemptions.
Here are examples of common bankruptcy exemptions:
- Homestead exemptions
- Motor vehicle exemptions
- Tools of the trade exemptions
- Personal property exemptions
- Life insurance exemptions
There are additional federal exemptions that apply for all kinds of legal cases, not just bankruptcy cases. For example, retirement accounts have asset protection and cannot be taken in either lawsuits or bankruptcy.
If you even have a glimmer that bankruptcy may be inevitable, consult with a qualified bankruptcy attorney before paying back any debt to an “insider”. You are not permitted to favor one creditor over another.
Your mom, brother-in-law, any relative, or business partner would be categorized as an “insider”.
If you have made any repayments in favor of one creditor over another, you’ll either have to undo the transfer or wait to file your bankruptcy petition. The court will investigate any repayments made within the last year.
Be sure to consult with a bankruptcy attorney before filing if you think you may be accused of favoring one creditor over another.
A lien is a legal right to take your property and either keep it or sell it to pay off your debt. The most common examples of liens are the mortgage on your house and the car loan on your car.
Do not ignore any creditor lawsuits against you. If you don’t defend against a claim, the court will find for your creditor and put a lien on your property. The property can be sold, with your creditors keeping the profits.
If a creditor is threatening lawsuit or you’ve received a notice of a lawsuit, consult with a bankruptcy lawyer immediately.
Chapter 7 Bankruptcy is often called the “liquidation bankruptcy” because any assets greater than the exemption amounts can be seized and sold (i.e. “liquidated”) with the proceeds going to your creditors.
Liquidation is a very real issue; fortunately, most folks filing Chapter 7 don’t lose any of their assets.
An experienced bankruptcy lawyer can help you protect the maximum amount of property possible and minimize or avoid liquidation.
The means test is a seemingly simple, yet complicated, financial test to determine whether bankruptcy filers qualify to file for bankruptcy protection under Chapter 7. If you don’t qualify under Chapter 7, you usually can file under Chapter 13.
Do not count yourself out of Chapter 7 on your own.
- Because of complexities in the law such as “special circumstances”, you may qualify for Chapter 7 and not realize it.
- Your income is not the only relevant factor.
Consult with a qualified bankruptcy lawyer to determine, first, whether bankruptcy is appropriate for your individual situation and, if so, whether Chapter 7 or Chapter 13 offers you the most benefits.
No Asset Case
Oddly, “no assets” doesn’t actually mean “no assets”.
A no asset case means that the bankruptcy filer doesn’t have any assets other than those exempted assets protected by law. A “now asset” case just means that no assets will be seized and sold to pay off creditors.
If you live in Florida and file for bankruptcy protection under Chapter 7, you can have a house worth $1 million and your case would still be considered a “no asset” case.
In a Chapter 7 Bankruptcy, some debts can be discharged (aka “forgiven” or “wiped out”); however, because of public policy reasons other debts are non-dischargeable.
Non-dischargeable debt would include:
- Student loans
- Most tax bills
- Criminal fines and restitution
- Child support
- Personal injury awards (in drunk driving cases)
When you file bankruptcy, your car loan is dischargeable, meaning that you don’t have to pay it back; however, because there is a lien on your car (by the person who loaned you the money to purchase the car), the car would be repossessed to fulfill your loan agreement.
If you want to keep you car, you can sign a reaffirmation agreement. The agreement says that even though you don’t have to pay off your car loan, you are agreeing to do so anyway, and you keep your car.
Your bankruptcy application will be very detailed, and lengthy. The schedules (weird use of the word, we know) list all of your assets, debts, and other financial information such as living expenses.
Be sure to use the official bankruptcy schedules or the court will reject your application.
The loan you took out to pay for your house is secured by a mortgage on your home. If you don’t pay back that loan, the mortgage lender will foreclose on your house, sell it, and use the proceeds to pay off your loan.
- Any debt that has a lien on an asset is a secured debt. Car loans and mortgages are the most common examples. Secured creditors can take back your property to pay off your loan.
- Unsecured debts include personal loans, medical bills, and credit card debt. Unsecured creditors cannot take back any property to pay off your debt.
However, they can sue you and if they win the lawsuit, the court will garnish your bank account and/or wages to pay off the debt.
Never ignore a lawsuit. Ignoring a lawsuit will not make it go away.
The bankruptcy trustee is the person who will oversee your bankruptcy case to make sure you are acting properly and to receive any payments from you to pay off your creditors.
The trustee will review your bankruptcy filings and bring action against you or a creditor who has not acted property.
- If you have assets in excess of those protected by exemptions, the trustee will take your property, sell it, and pay off creditors. (Your attorney will show you how to protect the maximum amount of property. You may be able to keep everything.)
- If you have favored an “insider” with repayments, the trustee will go after those funds that were repaid. (Be sure to disclose all repayments, even informal ones, to your bankruptcy lawyer.)
- You will meet the trustee at the 341 Meeting (aka “Meeting of Creditors) and he or she will ask you questions. (No worries your lawyer will be with you.)
Where to Get More Bankruptcy Information
Those are the main terms used in bankruptcy. Of course, you may run across other bankruptcy terms.
If you are wondering whether bankruptcy is right for you or are having challenges understanding bankruptcy terms and procedures, feel free to consult with a bankruptcy attorney.
You can receive a free case evaluation by consulting with the bankruptcy attorneys from www.attorneys.org. The site is free, private and without obligation. Or, you could ask a friend for a referral or call the local bar association for a list of bankruptcy lawyers.