Words and phrases frequently encountered in bankruptcy cases

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Abandon (abandonment): The Trustee appointed by the court to represent the interest of your creditors must either abandon (release) or administer (liquidate –sell, convert to cash) the assets of your bankruptcy estate. In most cases, the Trustee abandons all assets. However, until the Trustee abandons an asset, you are not free to sell, transfer or borrow against it. In some cases, it may be necessary to file a motion to ask the court to compel the Trustee to abandon or declare specific assets abandoned if the Trustee delays abandoning them while administering other assets or claims of the estate.

Adequate protection: Bankruptcy law may require the Debtor to maintain full-coverage insurance on collateral and immediately start paying recurrent monthly payments on a secured debt while the creditor is prohibited from auctioning off its collateral. When a creditor has a lien against property, the creditor is entitled to be “protected” from depreciation and destruction of its collateral. For example, the automobile that is collateral for an automobile loan is constantly depreciating and could be damaged, stolen or destroyed at any time. Bankruptcy prohibits the creditor from repossessing and selling the vehicle while the case is pending and the creditor’s position gets worse day-by-day as the vehicle goes down in value and the collateral is exposed to damage and theft. Secured creditors are entitled to adequate protection to offset the depreciation of collateral and to compensate in the event the collateral is lost, stolen, damaged or destroyed.

Administrative case: The bankruptcy case seeking to eliminate or restructure debt. In bankruptcy cases, if the person filing bankruptcy is eligible to receive a discharge of debt, and assuming there's no opposition or objection from anyone, if the person filing (the Debtor) files all required documents with the Clerk of the Court, appears for the meeting of creditors and cooperates with the trustee and performs all the duties of a debtor in bankruptcy, the court will issue a discharge automatically (no particular effort required beyond filing the complete documents and cooperating with the Trustee). A good analogy is it is like putting your car through the auto-wash – you drive up on to the conveyor, put it in neutral and the rest is automatic. The car comes out the other side of the car wash clean. The administrative case does not generally involve many contests (disputes).

Administrative claim: A claim that is necessary to pay in order to administer the bankruptcy case (for example, fees due the Trustee, Trustee’s attorney, Debtor’s attorney, accountant, landlord, utility company or other service provider without whose services the case could not be effectively administered or Debtor would be rendered incapable of going through bankruptcy). Administrative claims are generally entitled to payment before any other claims.

Adversary case: A case that is related to the administrative case, assigned to the same judge presiding in the administrative case, but with a separate case number, wherein there is some controversy, dispute or question that may be resolved under the bankruptcy code or applicable state law and where the interested parties are entitled to formal notice and an opportunity to contest and litigate the issues. The most common examples: an adversary case is filed when a creditor wants to deny the Debtor a discharge based on allegations of fraud (incurring debt under false pretenses, making false statements in credit applications or “running up” debts with the intention of declaring bankruptcy to eliminate the debt); the Debtor files an adversary case to ask the court to declare a second mortgage void; the Debtor files an adversary case asking the court to declare student loans dischargeable on the basis of undue hardship; the Trustee commences an adversary case to recover an asset transferred away by the Debtor prior to filing.

Amortize (amortization): A computation (formula) for scheduling repayment of a debt plus interest, over time, in regularly scheduled payments that allocate (apply) pre-determined portions of each payment to the loan balance and accrued interest. A good example of amortization is seen in a typical home mortgage loan based on the declining principal balance method, where at the beginning of the repayment period, most of the payment is allocated to paying the accrued interest with less being applied to loan balance and, over time, the trend is reversed as accrued interest diminishes with the declining loan balance and, consequently, more of the payment may be applied to remaining loan balance (the borrower ends up paying mostly interest in the beginning and relatively little is applied to the actual loan balance until later in the life of the loan).

Arrearage: The total of payments that are past-due (over-due) according to the loan agreement (contract or Promissory Note).

Assessment (tax)(HOA): The act and moment (date and time) when a creditor exercises its right to impose a charge against you and make a record of it. For example, tax assessors declare tax debts are due and make records (they mail a bill and make notation in government financial records). Homeowners associations declare fees are due according to rules that govern the homeowners association (similar to corporate bylaws).

Asset: In bankruptcy, an asset is anything possessed (at any time) by the Debtor and anything in which the Debtor owns or could claim an interest, even though it may be possessed by someone else, without regard to the state of title (you can own an interest in something even when it is titled to someone else). Assets constitute your property and your property consists of everything you own (land, vehicles, furniture, clothing, food, investments, contractual rights including pension and insurance claims, and claims and causes of action, including rights as an heir or beneficiary in the estate of a benefactor or trust). Depending on the context in which you refer to it, an asset might be a current asset or a former asset (even after it is no longer part of your actual or current property).

Assignment: The act of transferring an interest (including the right to receive payment from someone who owes you money) to another. For example, your mortgage company may assign its right to receive payment to a different mortgage company (selling its rights) and then your obligation is to the assignee (the new mortgage company) and they have all the rights the original creditor had to collect (and foreclose, etc).

Assume (assumption): In bankruptcy, you may assume or reject a lease (as in an apartment or vehicle lease). If you assume, you are bound by the terms of the lease and will still have financial responsibility under the terms of the lease, regardless of whether your keep the property and pay lease payments. If you reject the lease, you have no further liability (assuming you surrender the property to the lessor and do no damage to it after filing the bankruptcy case).

Automatic stay: The Bankruptcy Code (federal law) at section 11 U.S.C. 362 provides that an order will go into effect at the instant a bankruptcy case is filed on your behalf that makes it illegal for creditors to take any action against you or your property to collect any debt, prohibiting all forms of debt collections including communication (calls and letters). There are limitations and not every Debtor in bankruptcy qualifies for the automatic protection (people who have filed cases that have been dismissed because they failed to fulfill their obligations as Debtor can be disqualified for bankruptcy protection). The automatic stay does not prohibit collection of criminal fines, court costs, restitution, probation fees and ongoing child support and maintenance.

Avoid (avoidance): 1) A procedure that renders an interest void. Bankruptcy court has the power to avoid (render void, null, ineffective) the lien, mortgage or interest a creditor claims in the Debtor’s property when the creditor failed to perfect (validate, record, report) its interest in the property within statutory time limits prior to the commencement of the bankruptcy case; and when the value of the property does not exceed the first (or superior) lien-holder’s claim (as in a second mortgage where the first mortgage balance exceeds the value of the property). 2) The process of un-doing a transfer, payment or conveyance in order to recover an asset of the bankruptcy estate (for liquidation and re-distribution to creditors and claimants).



Bad faith: In bankruptcy, bad faith is used to describe the conduct of the person filing the bankruptcy case when it appears the filer lacks sincerity of purpose. For example, filing a series of cases without meeting the requirements. As each case is dismissed, the debtor loses bankruptcy protection and instead of rehabilitating and reinstating the existing case, the debtor files a new case. Filing a case for the essential purpose of delaying (rather than restructuring) a creditor’s rights with respect to collateral also constitutes bad faith (for example, filing a bankruptcy case may prevent a mortgage lender from conducting the foreclosure sale pending on a house, but then if the debtor does not resume mortgage payments, the lender will eventually be permitted to finish the foreclosure and the bankruptcy has merely delayed the foreclosure and denied the creditor its contractual rights). Bad faith is grounds for the court to dismiss the bankruptcy case and prohibit the debtor from filing cases in the future. Creditors can also be guilty of bad faith in their dealings with the debtor, the court and court officials and can also be penalized for acting in bad faith.

Bankruptcy: A legal procedure that is, for the most part, voluntary on behalf of the Debtor (in other words, the Debtor usually petitions the bankruptcy court to be subjected to the procedure, but creditors may also force a Debtor into bankruptcy by filing an involuntary Petition) for determining (identifying) the Debtor’s debts and assets, designed to to permit an orderly distribution of assets to creditors of the Debtor and (ordinarily but not always) resulting in a discharge (release, forgiveness of debt by court order) of most debts not satisfied by the distribution of the Debtor’s assets. Bankruptcy in the United States is a matter of federal law and is specifically reserved to the powers of the federal government in the Constitution. The overriding purpose is to permit honest Debtors to wipe the slate clean and get a fresh financial start, while respecting the rights of creditors and ensuring equal treatment of all those who might have claims against the Debtor.

Bankruptcy estate: The moment a bankruptcy case is filed in Bankruptcy Court, an estate is created (like a new-born baby or newly formed corporation) and it consists of all the Debtor’s property and debts. The Debtor in bankruptcy has duties to the estate, the Trustee appointed by the court has duties to creditors. The court oversees the administration (management) of the estate. In Chapter 7 cases, the estate typically has a life cycle of about six months in no-asset cases (where no property is distributed to creditors). Chapter 13 has a maximum duration of five years. Chapter 11 has no limit on duration (it just has to be "reasonable").

Bar date:The latest date by which a claim, response or objection may be filed and be considered by the Court before making a decision on a proposal before the court.

Bare legal title (legal owner/owner of record): When someone holds legal title to a vehicle (real estate, other property), but did not transfer any money or property in order to obtain title, did not receive title as a gift, does not treat the title or the vehicle as his own and regards the title and the vehicle as truly belonging to someone else. Example, son's vehicle (that son paid for) is titled to father, in order to make insurance more affordable - father is bare legal title holder, owner of record, legal owner, but son is equitable or beneficial owner). Title is evidence of ownership but does not determine who the true owner is for all intents and purposes.

Beneficial interest (equitable owner/beneficial owner): You can be the beneficial owner of property that is titled to someone else, specifically if you paid for it, purchased it, received it by gift, acquired it by whatever means and you (along with everyone else) consider the property to be yours (you are the true “owner”, even though it is titled to someone else). A beneficial interest in property is an asset, regardless of how the property is titled. One can be the “beneficial owner” or “equitable owner” of something that is titled to someone else.

Best interest of creditors test: One of a handful of “tests” bankruptcy reorganization plans must pass in order to be approved by the court. If creditors do not come out as well under a proposed plan of reorganization as they would if there were no bankruptcy, the plan does not pass the test and cannot be approved (confirmed).

Broker price opinion: When a home mortgage borrower fails to make scheduled mortgage payments, the mortgage lender may employ a real estate broker to determine the value of the house in order to inform the mortgage lender as to the likely result of a foreclosure (the question being, will the mortgage lender receive at least the amount of the outstanding loan balance if a foreclosure sale is conducted). Mortgage loan contracts usually provide that the borrower (the home owner) is liable for the cost of obtaining broker price opinion (the cost is passed on to the borrower).



Cash collateral: Loan documents may contain provisions that give the creditor rights in money generated from the use of the collateral (common example would be where the mortgage lender on an apartment complex has rights to the rents collected from tenants). In bankruptcy, the debtor (for example, the owner of the apartment complex) is prohibited from using the rents collected without getting consent from the mortgage lender and approval from the court and the court can restrict how cash collateral is used.

Cause of action: A form of property that consists of the right to make a claim (a demand for money, property or performance) under a legal theory (for example, if you are injured in an automobile collision as a result of the other driver’s careless driving, you have a cause of action against the driver to compensate you for your wage loss and reimbursement of your medical expenses).

Civil arrest warrant: Courts may issue warrants (orders) to court deputies and police officials to detain you whenever you come into contact with them, or even to go find you. Civil arrest warrants are available to the court and to other parties in a law suit when a party or witness refuses to comply with court orders and frustrates the legal process. In collection law suits, a creditor will sometimes ask the court to issue a civil arrest warrant against the borrower if the borrower fails to show up for a judgment debtor exam.

Claim: A demand for money or property and assertion of a cause of action. In bankruptcy, claims may be reported (filed) on an official form where the creditor identifies the amount and nature of debt it alleges the debtor owes.

Claims bar date: The court may impose a deadline on claimants (creditors) to file claims and creditors who fail to file within the time set by the court are not eligible to receive any distribution from the bankruptcy estate and can maintain no claim against the debtor after that date, assuming the debtor receives a discharge.

Clerk of court: An official who maintains the records of the court, collects filing fees, gives notice of proceedings and may, in some circumstances, determine the outcome of cases based on rule violations and deficient filings. The Clerk is restricted from giving legal advice.

Co-debtor (cosigner/co-borrower/guarantor): When a creditor is unwilling to extend credit based on your circumstances, past credit or lack of credit history, the creditor might agree to make the loan on the condition you have someone to sign to be responsible to repay the debt along with you. When you file a bankruptcy case, the court has the power to affect your liability and eliminate it (discharge), if you qualify. The court does not have jurisdiction to discharge your co-debtor’s responsibilities (your cosigner continues to be liable).

Co-Debtor stay:In Chapter 13, if someone is liable with you on a consumer debt (not commercial), you may propose a plan to repay the debt in full and by doing so you can protect the cosigner from any negative consequences from the debt and the bankruptcy, including protection from negative credit reporting.

Commencement (date of filing Petition): As of the date and time of filing the Petition for Relief with the bankruptcy court, a couple things happen: 1) the automatic stay goes into effect (protecting debtor’s property), if available, and 2) the bankruptcy estate is created. Debts incurred prior to commencement are pre-petition debts and it’s illegal for creditors to take any action to collect while the case is pending. Debts incurred after the date of commencement are not affected by the bankruptcy.

Commitment period: In Chapter 13, depending on your income during the six months prior to commencing the case, bankruptcy code determines either a minimum 36 month commitment period or a 60 month commitment period. Applying a formula almost identical to the Means Test in Chapter 7, before you are eligible to receive a discharge of debt in Chapter 13, you must pay all of your “disposable income” (the result of a mathematical formula) to your unsecured creditors each month throughout the commitment period. You may dismiss (withdraw, cancel) your Chapter 13 case at any time as a matter of right (if you decide you do not want to be in Chapter 13 at any time during the case, you have the right to dismiss your case. Upon dismissal, creditors may resume collection activity). The fact that you filed a bankruptcy case, even if you did not complete it and receive a discharge, is subject to being reported in credit report for up to 10 years.

Complaint (state court) (adversary) (turnover)(determine dischargeability): The first document filed in a law suit where the plaintiff (the person demanding justice) states the grounds upon which they are entitled to judicial action (judgment, order, decree). To make sure the defendant knows the allegations being made and has an opportunity to deny and defend, the complaint has to be delivered to the defendant, either by personal (in-hand) service (by a process server), mail, certified mail or publication in the local paper if no other more direct means is available.

Confirmation (of plan): If a bankruptcy plan of reorganization complies with requirements of the Bankruptcy Code, the Bankruptcy Court may “confirm” or approve the plan and make the terms of the plan binding on creditors (permanently adjusting the rights of creditors and eliminating certain debts). If a plan cannot be confirmed, the case must eventually be dismissed (thrown out) or converted to another variant bankruptcy proceeding.

Consumer goods: Goods bought and used by consumers, such as household furnishing and appliances, as opposed to machinery and equipment bought by businesses.

Contemporaneous exchange (of value): An exchange of money or other things of value that occurs nearly simultaneously. For example, when you purchase groceries and pay with cash or a debit card, there is a contemporaneous exchange (the store provides groceries to you in exchange for the money you pay at the check out). By contrast, if you visit the doctor today, but delay paying the charges until 60 days later, that is not a contemporaneous exchange (see Preference).

Contract rate (of interest): The percentage rate of interest provided for under the loan agreement.

Conversion (from one chapter to another): Bankruptcy Code allows the Debtor to convert from a proceeding under one Chapter to another (for example, one may convert a Chapter 13 case to a Chapter 7 case, if one is eligible to be a Debtor in Chapter7). In some cases, converting is a matter of right (there is no basis to oppose conversion). Although uncommon, the Debtor may have no choice but to convert, as in the case of someone who fails the Means Test, or else face dismissal of their case altogether.

Corporate advance Commonly observed in the context of a mortgage loan, where the lender pays for various services in connection with real estate (for example, broker price opinion, force-placed insurance, property preservation expenses, attorneys fees, foreclosure costs)

Cram down: Bankruptcy Code allows the Debtor to ask the court to limit a secured creditor’s secured claim to just the value of the collateral. For example, if you owe $2500 for a TV that’s worth just $500, you may pay just $500 for the TV and the remaining $2000 will be treated as an unsecured debt and may be discharged (like a credit card or medical bill) and the lender retains no further interest in the TV. There are several limitations on your ability to cram down however: you can’t cram down on the first mortgage on your residence; you can’t cram down on a vehicle loan you took out within 910 days (roughly 2.5 years) prior to filing the bankruptcy case; you can’t cram down on consumer goods financed within the year prior to filing. While cram down is a feature of reorganization cases (Chapter 13, Chapter 11), you find a similar result in Chapter 7 if you opt to Redeem collateral and pay just its current fair market value.

Credit briefing (pre-filing): Bankruptcy law requires the individual filing a bankruptcy case to complete a program presented by a provider approved by the United States Trustee’s office in Washington, DC. Sometimes referred to as a “credit counseling course”, the presentation is available on the internet, by phone and in person, it usually requires less than an hour, and the cost ranges from $10 - $50. Most importantly, it is impossible to “fail” the pre-filing credit briefing. It is not a test, there are no wrong answers, you do not get a grade and the provider does not have the power to disqualify you for bankruptcy. It is, at worst, a minor inconvenience imposing a brief delay and modest additional cost.

Creditor: A creditor is someone (an individual, company or government agency) that possesses (or claims to have) the right to receive money, property or the performance of some act from a Debtor. If you declare bankruptcy, you are required to identify all your creditors, including your mortgage and auto lenders, friends, family and others whom you might prefer did not find out about the bankruptcy, and those whom you intend to continue to pay.

Cross-collateralization: A legal device employed frequently by credit unions to reduce the risk of default (failure to pay) and increase the likelihood that the borrower will repay an extension of credit in full. For example, when the credit union lends money to finance the purchase of an automobile, it records a lien against the title of the automobile which gives any potential purchaser notice that there is a debt owed against the vehicle and that it is being used as collateral for a loan. When the loan has been fully repaid, the credit union releases its lien (a new title is issued that reflects no lien and you own the vehicle “free and clear”). If you incur debt on a credit card issued by the same credit union before you have fully paid off the vehicle, the credit union frequently requires you to agree in writing that the automobile will also be collateral for the credit card and that the credit union will not release its lien until BOTH the auto loan and the credit card have been paid in full.


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