If you’re facing bankruptcy, it’s already a confusing time. Even more confusing is the terminology that goes hand in hand with understanding bankruptcy law. Below we outline some of the more common terms that you will come across and need to understand.
Understanding Bankruptcy Terminology
Assets are every form of property that a debtor owns. These assets will need to be disclosed during a bankruptcy.
An Automatic Stay is an injunction issued automatically when a person files for bankruptcy. This action prohibits collection actions against the debtor, the debtor’s property, or the property of the estate.
Bankruptcy Code, or Title 11 of the United States Code governs all bankruptcy proceedings.
A Bankruptcy Estate is all of the legal and equitable interests of a debtor when the bankruptcy is started.
Chapter 7 bankruptcy is when assets are liquidated to pay the debtors debt. This is the most common form of bankruptcy and available to individuals, married couples, partnerships and corporations.
Chapter 11 bankruptcy is a reorganization of a debtor’s debt that ensures claims of creditors will be pain in part or in whole by a debtor. This process allows a debtor to continue business.
During Chapter 13 bankruptcy, a repayment plan is created for individuals with debts falling below statutory levels. This reorganization provides for repayment of some or all of the debts out of future income over 3 to 5 years.
Collateral is property that is subject to a lien. A creditor that has rights in collateral is a Secured Creditor and has additional protections in the Bankruptcy Code for the claim secured by collateral.
When a plan for repayment of debts in a Chapter 11, 12 or 13 is Confirmed, that means the terms of the plan are binding.
Debts are called Consumer Debts when they are incurred by an individual for personal, family or household purposes. Taxes and business loans are not considered consumer debts.
Bankruptcies can be converted to other forms of bankruptcy in what is called a Conversion. For example, a Chapter 7 case may be converted to a case under Chapter 13 if the debtor is eligible for Chapter 13.
A Creditor is the person or organization to whom the debtor owes money or has some other form of legal obligation.
A Debtor is the entity ( person, partnership or corporation) who is liable for debts, and who is the subject of a bankruptcy case.
During a Chapter 11 case, a debtor typically remains in possession of its assets and assumes the duties of a trustee. A Debtor in Possession is a fiduciary or trustee for the creditors of the estate.
A Discharge is the legal elimination of debt during a bankruptcy case. When the debt is discharged, a debtor is no longer required to pay the debt to the creditor. Debt is considered Dischargable if it can be eliminated in bankruptcy.
When the debtor’s discharge is denied it is called a Denial of Discharge. This means the debts that could have been discharged in that case cannot be discharged in any subsequent bankruptcy.
Dismissal occurs when a case is terminated without a discharge or discharge. If a case is dismissed, the debtor and the creditors have the same rights as they had before the bankruptcy case was started.
The document that initiates a bankruptcy case is called a Petition. This initiates an automatic stay.
Secured and Unsecured Debt
Secured and Unsecured debts play a role in your bankruptcy. Because of that, it is important to understand the difference between the two.
An Unsecured Debt does not have specific property that serves as collateral for payment of the debt. So, if you are unable to make payment on an unsecured debt, a creditor cannot take your property without first suing you and getting a court judgment. Examples include the following:
- department store and other credit card charges
- student loans
- telephone, electric, other utility bills
- medical bills
- personal loans that did not require a security agreement or mortgage to obtain
- court judgments that have not yet been enforced by remedies such as garnishment or attachment
- income taxes
- back rent (this is dependent on the state you live in).
Secured Debt has a piece of property that serves as collateral for the debt. If you fail to make payments, a creditor can take the property.
In addition to terminology, understanding the following aspects of bankruptcy will help you be more prepared to take the next step.
Other Aspects of Bankruptcy
Chapter 7 bankruptcy case lasts an average of four months. A Chapter 13 bankruptcy plan lasts for three to five years. A Chapter 11 bankruptcy case may last for two years or longer.
Public Scrutiny
When filing bankruptcy you must be prepared to expose your financial life to the public. You will be required to attend a meeting of creditors when you file for bankruptcy protection. During which the bankruptcy trustee (and maybe even one of your creditors) will ask you probing questions in a public room. Often this can be an extremely uncomfortable and embarrassing process.
Disclosing Your Financial Information
You must be completely honest in bankruptcy because bankruptcy courts feel that only the honest debtor is entitled to a discharge of debt. You must list all of your property, debts, and creditors. If you fail to do so you may you lose the bankruptcy discharge. Because dishonesty in bankruptcy is a serious federal crime you might also be subject to an FBI investigation.
Requires Great Attention
Because bankruptcy is based on forms many people perceive it is a simple and straightforward process. But the forms contain complex questions about your financial affairs and require sufficient time to understand the bankruptcy forms before filing for bankruptcy.
Bankruptcy Discharge is Personal
Discharge is the ultimate goal of bankruptcy. It bars your creditors from ever attempting to collect debts from you and you alone, and does not eliminate the debt itself. So, for example, if you are one of the co-signers on a home loan and you file for bankruptcy, the debt is not wiped out and the lender can still seek to collect the debt from your co-signer.
It’s Not Cheap
Filing for bankruptcy can cost you a significant amount of money, especially if you decide to hire an attorney which can cost anywhere from several hundred dollars to several thousand dollars. Even if you decide to prepare and file your own bankruptcy case it can be costly because the filing fees alone are substantial. Debtors may find relief from filing fees by petitioning for a fee waiver. The court bases its waiver decision on your income, which generally must not be greater than 150% of the federal poverty level.
Working with a Bankruptcy Attorney
Bankruptcy law can be hard to understand. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.