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Glossary of Common Consumer Bankruptcy Terms
Arrears (mortgage) – The amount of money that you are behind on your mortgage. In a Chapter 13 case, this amount will be spread out over five years and paid through your bankruptcy plan. When you complete your Chapter 13 plan, you will then be current on your mortgage.
Assume – An agreement to continue performing duties under a contract or lease. For instance, when you file for bankruptcy, you do not necessarily have to give up your contracts on utilities, cable, storage units, apartment leases, or the like. By assuming the contract you can continue using the service as usual.
Automatic Stay – An order from the bankruptcy court that automatically stops lawsuits, foreclosure, garnishments, and all collection activity against the debtor once a bankruptcy petition has been filed. With rare exceptions, debt collectors, mortgage companies, and anybody else you owe money to have to go through the bankruptcy court for any collection activities.
Bankruptcy – Bankruptcy is a special procedure under federal law to help people better manage their debt problems. The bankruptcy process has been around for centuries; it is even specifically mentioned in the Bible and the United States Constitution.
Bankruptcy Court – The federal court where cases under the Bankruptcy Code are heard. Bankruptcy judges are federal judges, but they are specially trained to deal only with bankruptcy issues.
Bankruptcy Petition – The document filed with the bankruptcy court that starts a bankruptcy case. The petition not only starts the case, but also initiates the automatic stay.
Chapter 7 Bankruptcy– The chapter of the Bankruptcy Code that allows for liquidation of all non-exempt assets of the individual or company to clear unsecured debts. It is also known as straight bankruptcy. This form of bankruptcy can be relatively quick, ending in as little as a few months. For most Texans, filing a Chapter 7 bankruptcy results in no loss of property.
Chapter 13 Bankruptcy – An individual’s plan to reorganize their debts. You pay a set amount of money each month, and the trustee will take that money and pay your creditors according to a plan that takes into consideration all of the debts and the debtor’s income. At the end of the case, any remaining dischargeable debts dealt with through the plan are discharged.
Confirmation – The final approval by the bankruptcy court of a debtor's Chapter 13 plan.
Credit Counseling Course – This is a class that must be completed before the debtor may file the bankruptcy petition. It is also known as the “ticket in” to bankruptcy. This class instructs on the credit and financial effects of a bankruptcy; it can be taken online and takes only a couple of hours to complete.
Creditor – A person or business to which the debtor owes money or claims to be owed money by the debtor. Creditors can be anybody from relatives to major national banks. The bankruptcy process involves all of them.
Debtor – The person seeking protection from creditors under the bankruptcy laws.
Discharge – A discharge is a piece of paper you can use at the end of your case to tell your creditors that you do not have to pay them because your liability on the debt is wiped out. Creditors may be breaking the law when they try to collect on a discharged debt.
Dischargeable Debt – A debt for which the bankruptcy code allows the debtor’s personal liability to be eliminated. This includes debts like credit cards, medical bills, and many others.
Equity – The value of the debtor’s interest in property that remains after the liens and other creditor’s interests are considered. For example, if a house valued at $200,000 has a $150,000 mortgage, there is $50,000 of equity.
Executory Contract – A contract in which some or all of the obligations of each party have not yet been completed. These are usually things like rental agreements for storage units, gym memberships, and car leases but can be many different kinds of contracts. Debtor’s usually have the ability to either continue with the contract (assume) or cancel it (reject) if the contract is no longer of benefit to the debtor.
Exemptions – Certain property owned by an individual debtor that federal or state law permits the debtor to protect from creditors; for instance, the “homestead exemption” may protect some or all of a debtor’s equity in house in which they live. Other exemptions include cars, clothes, jewelry, home furnishings, and sometimes even cash. A great number of people have only exempt property and therefore do not have to give anything up in a bankruptcy.
Financial Management Course – This is a class required by the Bankruptcy Code that debtors must take before receiving a discharge. It is known as the “ticket out” of bankruptcy because you will take this class after your case is filed, but before your discharge. The class discuses how to rebuild credit after a bankruptcy. Much like the first class on credit counseling, and not unlike defensive driving, it can usually be completed in less than 2 hours.
First Meeting of Creditors – Also called “the 341” meeting after the Bankruptcy Code section that requires them, the first meeting of creditors is somewhat of a misnomer because there is almost never a second meeting of creditors, and creditors almost never attend the meeting. It is usually held within a month of the filing of the bankruptcy petition. This meeting is in the federal courthouse downtown, but it is not in a courtroom or in front of a judge. The debtor and their attorney appear before their bankruptcy trustee who asks the debtor a few questions about what the debtor put on their schedules and whether everything in them is true and correct. The meeting usually takes no longer than 5 minutes.
Homestead – The principle place of residence of a debtor. This can be a house, condo, or any other permanent or fixed structure. State and federal provide special protections for the homestead.
Joint Petition – One bankruptcy petition filed by a husband and wife together.
Lien– A charge upon a specific property designed to secure payment of a debt. Liens include things like mortgages, but can also include car loans, mechanics liens, and certain loans on furniture or appliances.
Means Test– A test to determine whether the debtor may file a Chapter 7 bankruptcy or must file a Chapter 13 bankruptcy. Debtors who are above a certain income level, after taking into consideration certain secured debts, may have to file a Chapter 13 which means paying some money back to creditors.
Nondischargeable Debt – A debt that cannot be eliminated in bankruptcy. These usually include student loans and some taxes. Also, debts like DUI penalties, child support, and debts incurred by fraud are not dischargeable.
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. This process can be quite complex and should never be considered without close consultation with an attorney.
Priority Claims –These kinds of debts are paid first in a Chapter 13 plan. For individuals, these are usually some income taxes and delinquent child support. They are also non-dischargeable.
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 that would otherwise be subject to repossession.
Schedules – Lists submitted by the debtor along with the petition (or shortly thereafter) showing the debtor’s assets, liabilities, and other financial information. Compiling these schedules is usually the hardest part of the case, but also the most important.
Secured Claim – A secured claim is debt that has collateral associated with it. If you were not to pay the debt prior to bankruptcy, the creditor would be able to foreclose on the collateral or repossess the collateral. Typically, secured claims consist of a house, car, and sometimes furniture and appliances.
Trustee – The trustee is the person in charge of your bankruptcy case or who administers your case. The trustee has an obligation to ensure a fair distribution to your creditors and to ensure your bankruptcy plan complies with the Bankruptcy Code. You will meet your trustee at your creditors’ meeting.
Unsecured Claim – An unsecured claim is any debt or obligation that does not have collateral associated with it. Typically, unsecured claims are credit cards, medical bills, promissory notes/signature loans. These kinds of debts (with the exception of student loans) can easily be wiped out in a Chapter 7 bankruptcy.