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              Understanding the Language of Bankruptcy

  A

Adequate protection. Federal bankruptcy law protects the rights of creditors just as it does for debtors. The bankruptcy court provides periodical payments to creditor as a means to compensate for the debtor’s use of the property and to prevent “waste” of the property. Common examples are requiring the debtor to the make periodic payments or to provide additional or replacement collateral. Section §361 of the Bankruptcy Code statutorily defines adequate protection. Adequate protection issues are common in Chapter 13 bankruptcy cases.

Adversary proceeding.  A separate lawsuit involving the related parties and/or property of a particular bankruptcy case. The purpose of said lawsuit is for a bankruptcy Judge to clarify the rights between the respective parties. An “adversary” may be filed in connection with a bankruptcy case in which the debtor seeks to strip an unsecured “second” lien on real property. In other words, in the case where the fair market value of the property is less than what is owed, then no actual “equity” exists in the real property and the “second lien” on property can be removed. Additionally another example has a creditor and/or bankruptcy trustee filing an “adversary” to set aside a preference payment that the debtor may have made. The contested motion is treated as an adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 9014.

Allowed claim. A claim (i.e., a debt owed to creditor) that is entitled to receive a dividend (i.e., a payment) from the bankruptcy estate.

Anti-Deficiency Statute. A state specific law (in Arizona it is found at Arizona Revised Statues (ARS) section 15-120 which limits the right of a lender to  sue a debtor after a foreclosure or trustee sale. Under certain circumstances a borrower can simply “walk away” from a house with no adverse recourse.

Automatic Stay– a federal protective order that “stays” or stops certain collection activity by creditors once a bankruptcy petition has been filed. In most cases, all litigation involving the debtor as a defendant is “stayed.” Foreclosures (i.e., trustee sales) and vehicle repossessions are stayed. A creditor may seek relief from the stay in some situations. The automatic stay is one of the three major elements of debtor relief provided by the Bankruptcy Code and is the subject of Bankruptcy Code Section §362.

B

Bankruptcy Code. The set of federal laws that govern various bankruptcy relationships among parties located under Title 11 of the United States Code and effective since October 1, 1979. Later amendments made by Congress in October 2005 (a/k/a BAPCPA).

Bankruptcy Estate. Consists of all legal or equitable interests (e.g., all property) of the debtor at the time the bankruptcy petition is filed including a house, car, cash, bank accounts, etc.

Bankruptcy Petition. The first three pages of the bankruptcy packet that begins the bankruptcy case when filed with the court. The complete packet includes other documents such as your schedules of property, statements, etc.; merely filing the Petition will invoke the Automatic Stay but will ultimately result in the case being dismissed. Filing of the bankruptcy petition begins a time line. Reference is usually made by the terms “pre-petition” or “post-petition” debts respectively to demarcate which debts will be included in the current case.

Bankruptcy Proceeding. The judicial process that is begins with the filing of a “petition” of a particular Chapter of the Bankruptcy Code. Bankruptcy proceedings are Chapter 7 liquidations and the various reorganization proceedings under either Chapter 9, 11, 12 and 13.

C

Clerk of the Court. The court appointed federal administrator who has stewardship over and responsibility for maintaining the facility (e.g., court) by which you file the bankruptcy documents. While the administrator (he or she) is a particular person, the filing fee is to be paid to and made out in the generic term “clerk of the court” when your bankruptcy is filed.

Chapter 7. The liquidation portion of the bankruptcy code. A bankruptcy proceeding begun under chapter 7 has the debtor seeking to have non-exempt assets liquidated for the payment of dividends (“e.g., payments) to creditors. Chapter 7 bankruptcy is probably the most common bankruptcy proceeding. Most Chapter 7 bankruptcy debtors protect their assets by federal or state exemptions and are able to keep their home, autos and most other personal property. The most recent bankruptcy amendments in 2005 created the “Means Test” which limited the class of individuals eligible to file a Chapter 7 bankruptcy.

Chapter 12. A reorganization bankruptcy proceeding available for individuals who are fishermen or farmers. Chapter 12 bankruptcy is a rarely filed reorganization proceeding.

Chapter 13. A reorganization bankruptcy proceeding available for individuals. Chapter 13 bankruptcy is the most commonly filed reorganization proceeding to save a residence, an automobile, or as a repayment plan for tax debts. The duration of the plan is usually between 36 to 60 months.

Collateral. An interest in property or other rights held by a secured creditor that secures repayment of a debt. For example, real property, such as a house and land, is normally collateral for a mortgage or deed of trust. A motor vehicle is usually secured by a lien on the title and serves as the collateral of a promissory note.

Confirmation. The reorganization proceedings of a Chapter 9, 11, 12, or Chapter 13 bankruptcy in which the court approves the reorganization plan submitted by the attorney. Absence an objection from either the trustee or a creditor, the judge confirms the reorganization plan thus creating a new binding contract between the debtor and all creditors.

Consumer “no asset” bankruptcy. A Chapter 7 bankruptcy proceeding for an individual in which there are no assets available for distribution to creditors.  The debtor may still own property but

Conversion. Upon motion, the judge signs an order allowing the debtor to change which chapter of bankruptcy he may proceed.  A typical scenario has the debtor failing to make the required plan payments under Chapter 13 (i.e., case pending dismissal), and consequently, he must convert to a Chapter 7 in order to remain protected under bankruptcy law. Please note, conversion has severe consequences. In some cases the debtor may lose his house or car. In that case a Chapter 13 bankruptcy would be converted to a Chapter 7 bankruptcy or liquidation.

Cram-down. In certain circumstances a reduction in the amount owed to creditors is reduced to the “fair market value” of the property (in contrast to the contract price) Put another way, the debtor will pay the creditor the value of the property, not necessarily what is owed on the property.

Credit counseling course. BAPCPA amendments to the recent Federal Bankruptcy Code now require that a debtor complete a credit counseling course prior to the filling of the bankruptcy petition. The certification of completion of the course is filed with the bankruptcy petition. The course provider must be a court approved counseling agency, but the course can be taken via the Internet. Usually, the provider emails the certificate to the attorney for filing.

D

Debtor. The entity/person filing a voluntary bankruptcy proceeding or against whom an order for relief is entered in an involuntary bankruptcy is known as the debtor. An entity or person that owes a debt.

Deficiency balance. The difference between what is owed on a piece of property and what the property is worth at liquidation auction. For example, if you owe $200,000 on your house and it is foreclosed on and sold at a foreclosure sale for $150,000 then the deficiency balance is $50,000. A deficiency balance is most commonly seen when a car has been repossessed and sold at auction or there has been a foreclosure sale of a house. Bankruptcy can usually wipe out deficiency balances.

Discharge. Legal relief from debt provided for by Section 524 of the Bankruptcy Code. In other words, most of your unsecured debts are wiped out or eliminated. The discharge is one of the three elements of debtor relief provided for in the Bankruptcy Code, the other two being exemptions and the automatic stay. As a debtor, you will receive a Notice of Discharge upon completion of your bankruptcy case. In certain defined instances a debtor may not be entitled to a discharge of a debt(s).

Dischargeable debt. A debt subject to a debtor’s discharge in the bankruptcy process. The discharge relieves a debtor from legal liability for the debt.

Dismissal. The act of terminating a bankruptcy proceeding prior to discharge, the general effect of which is to restore the parties (the creditors and the debtor) to their rights and liabilities as they existed prior to the bankruptcy filing. A dismissal is different from a discharge because the debtor is not relieved from legal liability for the debt.

Disposable income. Sometimes called “discretionary income,” simply put it is all income not necessary for the maintenance or support of the debtor or a dependent(s) of the debtor. To determine the debtor’s disposable income, subtract the monthly expenses from the monthly income of the debtor.

E

Executory contract. Contracts for which performance remains due to some extent on both sides. Franchise or license agreements are common executory contracts. Executory contracts are the subject of Bankruptcy Code Section 365. An executory contract may be assumed or rejected by the debtor in the bankruptcy proceedings. If the executor contract is assumed, then the debtor remains liable for the payments toward the contract. If the debtor rejects the executor contract, then he or she is no longer liable for the payments toward to the contract and loses any benefits from the contract. Common examples are residential leases and cell phone contracts.

Exemptions. Property that an individual debtor may protect from becoming part of the bankruptcy estate. Such property is defined by law. Exempt property is not available to be used to pay a dividend to creditors; a debtor may keep exempt property. Exemptions are a primary element of debtor relief in a bankruptcy proceeding. Each state has different exemptions to protect the debtor’s property from creditors. Most people who file bankruptcy protect all or most of their property through exemptions. The debtor must usually use the exemptions of the state in which (s) he was residing 2 years before (s) he files the bankruptcy.

F

Federal exemptions. To further aid a debtor in getting back on their feet after bankruptcy and in contrast to the various state exemptions, Federal exemptions are those that are permitted under federal law pursuant to Section 522 of the Bankruptcy Code. Generally, these will differ from the state exemptions in the amount of value or equity that the debtor is allowed to exempt. Many times the debtor may not be able to use the state exemptions and instead must use the federal exemptions. Your attorney will use the appropriate exemptions in your bankruptcy petition.

Filing fee. The amount that the federal courts require you to pay to the court to file the bankruptcy. The filing fee is not part of the attorney’s fees. Currently, the fee for Chapter 7 is currently $306.00.

Financial management course. This course is required under the Federal Bankruptcy Code to be taken after the debtor files the bankruptcy petition. It must be provided by a court approved agency. Usually, the debtor takes the financial management course through the same agency that (s) he used for the credit counseling course. There is usually a time limit in which you must take this course, and the debtor is not eligible for a discharge unless certification of the financial management course has been filed with the court.

Fraudulent transfer. A transfer made by a debtor with the intent to hinder, delay, or defraud creditors. A transfer made without reasonable or fair payment to the debtor while the debtor is insolvent or a transfer that causes the debtor to become insolvent will also be fraudulent. Fraudulent transfers are the subject of Bankruptcy Code Section 548. Fraudulent transfers are one of the trustee’s avoiding powers.

Homestead. An exemption permitted for an individual debtor’s place of residence. Section 522(d) (1) of the Bankruptcy Code provides homestead exemptions. Most states have a separate homestead exemption that may protect the debtor’s primary residence from creditors in the bankruptcy proceedings.  For example in Arizona, the homestead exemption is $150,000 for the debtor’s residence.

I

Insider. Generally, an entity in control of a debtor or a debtor’s relatives. The definition of an insider will vary depending upon the debtor’s identity –whether the debtor is an individual, partnership, or corporation. Section 101 (30) of the Bankruptcy Code defines insider. Any time an insider is involved, the trustee will pay special attention to the transfer. Most insiders are either relatives or business partners of the debtor.

J

Joint Petition. A bankruptcy petition filed by a husband and wife together. A couple must be lawfully married to be eligible. No common law marriages meet this requirement at this time.

Judge. A federal bankruptcy judge appointed under Article I of the U.S. Constitution who has nationwide power to enforce the Bankruptcy Code. All bankruptcy cases are assigned a Judge. In many bankruptcy cases you may never actually appear before the judge.

Judicial lien. A lien that arises from a court order of judgment. For example, if a person sues you and wins the lawsuit, a lien may be established. A judicial lien may be a prejudgment writ of attachment or a post judgment writ of execution. Section §101 (32) of the Bankruptcy Code defines judicial lien. A judicial lien may be placed on a residence if the creditor has a judgment against the debtor. A bankruptcy attorney may be able to eliminate the judicial lien in the bankruptcy proceedings.

L

Lien. A right to property to secure repayment of a debt or the performance of an obligation. A lien may be a judicial, consensual, or statutory lien. Section 101 (33) of the Bankruptcy Code defines lien.

Liquidation. When the debtor’s property is sold and the proceeds are given to the creditors.

M

Market value. The value of an asset such as a house or a car. The market value for real or personal property is determined by the value assigned if sold in the ordinary course of business according to commercially reasonably terms.

Means test. A formula used in the bankruptcy process to determine if a debtor qualifies for a Chapter 7 bankruptcy, or if the debtor’s income is too high and the debtor must file a Chapter 13 bankruptcy in which (s)he must pay all or a portion of his/her disposable income to his/her creditors. This formula is based upon whether the debtor’s household income exceeds the average income in the debtor’s home county. If the debtor’s household income exceeds the median, then the debtor’s disposable income is will be used to determine whether the debtor qualifies for Chapter 7 or Chapter 13 bankruptcy. There are many variables to calculating this “means test.” This is one of the most important changes of the Bankruptcy Reform Act of 2005.

Motion for relief from the automatic stay. A motion made by a creditor, pursuant to 11 U.S.C. 362(d), to be freed from the effect of the automatic stay enacted by the bankruptcy court. Many times a creditor’s attorney may ask for relief from the automatic stay in an attempt to gain possession of the property.

N

No-asset case. Occurs when a debtor files a Chapter 7 bankruptcy case and there are no assets available to pay any of the creditors’ unsecured claims. Most Chapter 7 bankruptcies are no asset cases.

Non-dischargeable debt. A debt not subject to a debtor’s discharge, the debtor is not relieved from legal liability for the affected debt. Common examples of non dischargeable debts are child support and alimony, most taxes, and student loans. Other debts incurred within 90 days of filing bankruptcy may also be deemed non-dischargeable. The creditor may be required to file a Complaint to Determine Dischargeability of Debt with the Court. Non-dischargeable debts are described in Bankruptcy Code Section 532 (a).

Non-exempt asset. Property not protected by the exemptions provided by bankruptcy law. In other words, this is property that the bankruptcy trustee can take and sell and pay the creditors.

Non-purchase money security interest. A security interest in collateral where the purpose of the loan is other than to purchase the collateral.

O

Ordinary course of business. Normal, everyday business transactions.

Preference.  A payment to a creditor, within 90 days prior to filing of the bankruptcy (or one year if the creditor is an insider), in full or partial satisfaction of debt to the exclusion of other creditors. In other words, preference is showing favoritism to one creditor. A preference that meets defined conditions will be avoidable by a bankruptcy trustee. For example, if the creditor receives more than he would have in the debtor’s Chapter 7 liquidation bankruptcy.

Priority Claim. Generally, priority is the order in which unsecured claims are to be paid. A priority claim is an unsecured claim that is to be paid ahead of the other unsecured claims because of priority status. Usually non dischargeable taxes are given a priority status.

Proof of claim.  The filing of a formal written claim by a creditor in a bankruptcy proceeding. A proof of claim will usually be filed in a Chapter 7 proceeding to be entitled to receive a dividend from the bankruptcy liquidation. Most Chapter 13 creditors will file a proof of claim with the court in order to be paid by the Chapter 13 trustee in the debtor’s plan. If no proof of claim is filed, the creditor will not be paid.

Property of the estate. Property subject to administration by a bankruptcy trustee for the distribution of dividends to creditors.

Purchase money security interest. A security interest in collateral when the purpose of the loan is to purchase the collateral, such as obtaining a loan to purchase an automobile or furniture which will be used as collateral for the loan.

Reaffirmation. A debtor’s agreement to remain legally liable for repayment of a debt otherwise dischargeable in a bankruptcy proceeding. For a debt to be legally reaffirmed, strict compliance with the provisions of Bankruptcy Code Section 524 is required. If the debtor wants to keep an automobile after filing bankruptcy, he or she must sign a reaffirmation agreement with the creditor to retain the automobile.

Redemption.A right given to a Chapter 7 consumer debtor to pay a lump sum to a secured creditor in an amount equal to the value of the collateral. A valuation hearing may be necessary to determine the adequacy of the redemption amount. Section 722 of the Bankruptcy Code permits redemption.

Rule 2004 Examination. An extended examination of any person pursuant to Federal Rule of Bankruptcy Procedure 2004 regarding one or more aspects of a debtor’s financial affairs. A Rule 2004 examination is similar to a deposition in non-bankruptcy proceedings.

S

Schedules. Paperwork that includes detailed lists of the debtor’s property and obligations. The schedules are part of the bankruptcy petition and are included in the filing of the case.

Secured creditor. A creditor with collateral that may satisfy all or part of the creditor’s allowed claim. A mortgage company and finance company are secured creditors for a house and car, respectively.

Security. Commercial documents used to prove an ownership interest in an entity, among other things. Section 101(43) of the Bankruptcy Code defines security.

Security agreement. An agreement creating a security interest. A security interest is a consensual lien created by agreement such as from the purchase of an automobile. Section 101(44) of the Bankruptcy Code defines security.

Statement of Intention. A notice to be given to the holders of collateral security as the repayment of consumer debt. The debtor must advise any affected creditor of the debtor’s intention regarding the collateral. The debtor may reaffirm, redeem or return/surrender the collateral, or avoid the lien under specific defined circumstances. The statement of intention is filed with your bankruptcy petition and your attorney provides a copy to the secured creditors and the parties in executory contracts.

Statutory lien. A lien created by operation of law other than a court order. A state law mechanic’s lien is a statutory lien. Section 101(47) of the Bankruptcy Code defines statutory lien.

T

Transfer. Any means that is used to dispose of property or an interest in property. Section 101(50) of the Bankruptcy Code defines transfer. The bankruptcy court addresses transfers of property within two (2) years in Statement of Financial Affairs #10.

Trustee. A person appointed by the bankruptcy court to oversee your case. A Chapter 7 trustee, in theory, represents the interest of the creditors. A Chapter 13 trustee receives your monthly Chapter 13 plan payment and redistributes or pays the money to your creditors and reviews the viability of your bankruptcy plan. The trustee also conducts the meeting of creditors or 341 meeting.

Under-secured creditor. A secured creditor whose collateral is worth less than the total amount owed on its allowed claim. Common examples are medical bills and credit card creditors.

Unsecured claim. A debt owed by the debtor for whom the debtor has not made any assurance of payment and no collateral was offered. For example, a debt on a credit card or a medical bill would be an unsecured claim. Unsecured creditors are listed on schedule F.

 

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