Glossary
Bankruptcy Terms
In Plain English!
341 meeting – (see First Meeting of Creditors)
363 sale – the sale of corporate assets under Section 363 of the Bankruptcy Code. Under Section 363(f), a bankruptcy trustee or debtor-in-possession may sell the bankruptcy estate’s assets “free and clear of any interest in such property.”
Absolute Priority – the order of payment to the different classes of creditors mandated by the Bankruptcy Code. Claimants with higher priority are paid in full before other claims receive anything. Junior creditors and shareholders are paid after senior creditors. Specifically, the usual order is – first, administrative claims; second, statutory priority claims such as tax claims, rent claims, consumer deposits, and unpaid wages and benefits from before the filing; third, secured creditors’ claims; fourth, unsecured creditors’ claims and fifth, equity claims.
Adequate Protection – the right of a party with an interest in the debtor’s property (such as a secured creditor) to assurance that its interest will not be diminished during the bankruptcy proceedings. Example – a lender may ask the court for adequate protection on a car that is collateral for a loan. This will ensure that as Debtor pays for the car in the bankruptcy, this collateral (the car) will not rapidly lose its value leaving the lender damaged.
Administrative Claim – debt incurred by the debtor, with court approval, after the bankruptcy filing including – necessary costs of preserving the estate, wages, salaries, court costs, lawyers’ fees, accountants’ fees, trustees’ expenses, etc.
Adversary Proceeding – a lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the bankruptcy court.
Adversary proceeding – A lawsuit filed in the bankruptcy court which is related to the debtor’s bankruptcy case. Examples are complaints to determine the dischargeability of a debt and complaints to determine the extent and validity of liens.
Assets – Assets are every form of property that the debtor owns. They include such intangible things as business goodwill; the right to sue someone; or stock options. The debtor must disclose all of his assets in the bankruptcy schedules; exemptions remove the exempt assets from property of the estate.
Automatic Stay – the suspension of actions, such as debt collection or foreclosure, against the company in bankruptcy. This occurs automatically when a bankruptcy petition is filed. This action protects the debtor from creditors seeking to seize its assets such as in a foreclosure or a garnishment proceeding. It protects some creditors in that it prevents one creditor from obtaining an excessive share of the assets of the bankrupt company to the exclusion of the other creditors.
Avoidance – The Bankruptcy Code permits the debtor to eliminate (avoid) some kinds of liens that interfere with (or impair) an exemption claimed in the bankruptcy. Most judgment liens that have attached to the debtor’s home can be avoided if the total of the liens (mortgages, judgment liens and statutory liens) is greater than the value of the property in which the exemption is claimed. This is sometimes called “lien stripping.”
Avoidance Powers – Rights given to the bankruptcy trustee (or the debtor in possession in a Chapter 11) to recover certain transfers of property such as preferences or fraudulent transfers or to void liens created before the commencement of a bankruptcy case.
Bankrupt – the entity that files a bankruptcy; the debtor; the insolvent entity. This is a non-technical term and is not used in the Bankruptcy Code.
Bankruptcy – (see also failure and insolvency) a legal procedure for dealing with debt problems of individuals and business. A non-technical term for a legal state of insolvency.
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 – This legislation primarily affected consumer filings, making it more difficult for a person or estate to file for Chapter 7 bankruptcy. The BAPCPA impacted business filers as well–with the heaviest impact on smaller (those listing less than $2 million in debt) businesses. On October 17, 2005 the BAPCPA became effective.
Bankruptcy Code – the name given to the statutory body of bankruptcy laws after the Bankruptcy Reform Act of 1978.
Bankruptcy Court – the federal tribunal where cases under the Bankruptcy Code are litigated.
Bankruptcy Estate – all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.
Bankruptcy Judge – a judicial officer of the United States district court with decision-making power over federal bankruptcy cases.
Bankruptcy Mill – a business not authorized to practice law that provides bankruptcy counseling and prepares bankruptcy petitions.
Bankruptcy Petition – the document filed with the court to initiate a bankruptcy proceeding.
Bankruptcy Rule 2004 – a provision of the Bankruptcy Code that allows one party in a bankruptcy proceeding to compel discovery or other examination against another party.
Bar Date – the last date that creditors may file a claim against the debtor.
Cash Collateral – cash and cash equivalents held by the debtor in Chapter 11 subject to liens of other parties.
Chapter – the Bankruptcy Code is organized into Chapters. Except for Chapter 12, the Chapters of the present code are all odd-numbered and are enumerated with Arabic numerals. (Before the Bankruptcy Reform Act of 1978, the Chapters were numbered with Roman numerals.) Chapters 1, 3, and 5 cover matters of general application. Chapters 7, 9, 11, 12, 13 and 15 concern, respectively – liquidation (business or non-business), municipality bankruptcy; business reorganization, family farm debt adjustment, wage-earner or personal (i.e. non-business) reorganization and multi-national bankruptcies.
Chapter 07 – The most common form of bankruptcy, a Chapter 7 case is a liquidation proceeding, available to individuals, married couples, partnerships and corporations. Debtor’s debts are Discharged and Non-Exempt Assets are sold by the trustee.
Chapter 09 – bankruptcies of municipalities; only a few of these are filed each year.
Chapter 11 – reorganization proceedings, generally for business entities. The debtor maintains control of the business in Chapter 11, unless the Court appoints a trustee.
Chapter 12 – family farmer bankruptcies. This was created by Congress in 1986 (Chapter 12 became effective on November 26, 1986). Only a family-owned farm business can qualify for Chapter 12 and it must have debt less than $1.5 million and have 50% of its income from farming operations.
Chapter 13 – bankruptcy proceedings for an individual with the intention of rescheduling the his or her debt (rather than liquidating the individual’s assets and debt under Chapter 7). Chapter 13 cannot be used by a partnership or a corporation; it can be used by a sole proprietorship. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years. It is a very common choice for Debtors facing a foreclosure on their residence.
Chapter 15 – the chapter of the Bankruptcy Code dealing with cases of cross-border insolvency. It was formerly known as Section 304.
Chapter 20 – an unofficial term describing the filing of a Chapter 7 proceeding followed by a Chapter 13. The Chapter 7 filing eliminates unsecured debts while the Chapter 13 filing handles continuing liens.
Chapters X, XI and XII – before Chapter 11 of the Bankruptcy Reform Act of 1978, these three chapters of bankruptcy existed for company bankruptcies that involved reorganization. Chapter X involved reorganization for larger companies that held public debt or equity. Chapter XI was for readjustment of debts of smaller, non-publicly held companies, and Chapter XII was for companies with extensive holdings of real property.
Charged Off – This is an accounting term that means the creditor does not expect to collect on the debt. It relates to the creditor’s taxes. It starts time periods under the Fair Credit Reporting Act. It does not mean that the debt is no longer legally enforceable.
claims – rights to repayment made by creditors against a debtor; they may be liquidated, unliquidated, fixed, contingent, matured, unmatured, secured, unsecured, subordinated, legal or equitable. (See priority of claims.)
Collateral – The property which is subject to a lien. A creditor with rights in collateral is a secured creditor and has additional protections in the Bankruptcy Code for the claim secured by collateral. The measure of the secured claim is the value of the collateral available to secure the claim – it is possible to have a lien on property that is subject to a senior lien or liens such that the security available to pay the claim is really without value to the junior creditor. The general rule with respect to liens is “First in time, first in right.”
Confirmation – the final approval by the bankruptcy court of a debtor’s plan of reorganization in a Chapter 11, 12 or 13. Confirmation takes place after the plan has been approved by creditors and the Trustee (where one is necessary).
Confirmed – A plan of reorganization in Chapter 11, 12 or 13 approved by the court and binding on the parties is said to be confirmed.
Consumer Debt Debts incurred by an individual for personal, family or household purposes. Taxes are not consumer debts; neither are business loans. The Means Test only applies Debtors that owe primarily consumer debt.
Contested Matter – a dispute among the parties to a bankruptcy proceeding, instituted by the filing of a motion of the court.
Contingent Claim – a claim that may be owed by the debtor under certain circumstances. For example, where the debtor is a co-signer on another person’s loan and that person fails to pay.
Contingent – Used to describe debts that are not fixed in right at the time, but are dependent on some other event happening to fix the liability.
Conversion – changing chapters in bankruptcy (e.g., converting from Chapter 13 to Chapter 7 or vice-versa).
Conversion – Cases under the Code may be converted from one chapter to another chapter; for example, a Chapter 7 case may be converted to a case under Chapter 13 if the debtor is eligible for Chapter 13. Even though the chapter of the Code which governs it changes, it remains the same case as originally filed.
Core Proceedings – those proceedings that are inherent in and fundamental to the administration of a bankruptcy case. Core proceedings are subject to the jurisdiction of the bankruptcy court. Non-core proceedings may be conducted outside the jurisdiction of the bankruptcy court.
Cramdown – confirmation of a plan of reorganization over the objections of one or more classes of creditors. Example – a bank endures a Cramdown when it is forced to accept a reduction in the amount to be repaid by the Debtor on a car loan and the interest rate is reduced.
Creditor – The person or organization to whom the debtor owes money or has some other form of legal obligation.
Creditor – a person to whom or business to which the debtor owes money or that claims to be owed money by the debtor.
De-Consolidation – bankruptcy process by which the previously joined cases of two or more parties are divided by the court into separate cases that will thereafter proceed independently.
Debtor – The debtor is the entity ( person, partnership or corporation) who is liable for debts, and who is seeking protection from creditors under the bankruptcy laws.
Debtor-in-Possession – In a Chapter 11 case, the debtor usually remains in possession of its assets and assumes the duties of a trustee. The debtor in possession is a fiduciary for the creditors of the estate, and owes them the highest duty of care and loyalty.
Default – the failure by an entity to abide by the covenants in a debt obligation or other agreement to which it is a party. The most common default is non-payment of interest or principal.
Denial of Discharge – Penalty for debtor misconduct with respect to the bankruptcy case or creditors as a whole. The grounds on which the debtor’s discharge may be denied are found in 11 U.S.C. 727. When the debtor’s discharge is denied, the debts that could have been discharged in that case cannot be discharged in any subsequent bankruptcy. The administration of the case, the liquidation of assets and the recovery of avoidable transfers, continues for the benefit of creditors.
Discharge (of a debt) – the satisfaction or elimination of the debts of the debtor by the bankruptcy court. Generally, the Creditor can no longer legally compel the Debtor to repay a debt upon the Discharge of that debt.
Dischargeable – Debts that can be eliminated in bankruptcy. Certain debts are not dischargeable; that it, they may not be discharged through bankruptcy or may only be discharged through Chapter 13. Family support and criminal restitution are examples of debts which cannot be discharged. Debts incurred by fraud can only be discharged in Chapter 13.
Discovery (also called Discovery Proceedings) – used to obtain information, documents, statements and other evidence before a trial.
Dismissal – The termination of the case without either the entry of a Discharge or a denial of discharge; after a case is dismissed, the debtor and the creditors have the same rights as they had before the bankruptcy case was commenced. Dismissal is the penalty for many essentially minor infractions of bankruptcy procedures under the 2005 amendments.
Domestic Support Obligation – Debts for alimony, maintenance or support owed to child, spouse or governmental entity that paid for the support of the child or spouse. A new term introduced by the bankruptcy amendments of ’05.
ECF or Electronic Case Filing – ECF is a comprehensive case management system that allows courts to maintain electronic case files and offer electronic filing over the Internet. Courts make all case information immediately available electronically through the Internet.
Equity – the value of the debtor’s interest in property that remains after the liens and other creditor’s interests are considered.
Executory Contract – a contract in which some or all of the obligations of each party have not yet been completed. The debtor-in-possession (or trustee) is allowed to reject unilaterally certain executory contracts. Example – a Debtor chooses to reject a auto lease, a type of Executory Contract, in her Chapter 7 case.
Exempt (also called Exempt Property) – Property that is exempt is removed from the bankruptcy estate and is not available to pay the claims of creditors. The debtor selects the property to be exempted from the statutory lists of exemptions available under the law of his state. The debtor gets to keep exempt property for use in making a fresh start after bankruptcy.
Exemptions – this refers to assets or properties owned by the Debtor that cannot be liquidated by the Trustee or recovered by the Creditors.
Exemptions – Exemptions are the lists of the kinds and values of property that is legally beyond the reach of creditors or the bankruptcy trustee. The debtor in bankruptcy gets to keep the exempt property. What property may be exempted is determined by state and federal statutes, and varies from state to state.
Fiduciary – one who is entrusted with duties on behalf of another. The law requires the highest level of good faith, loyalty and diligence of a fiduciary, higher than the common duty of care that we all owe one another. The debtor in possession in a Chapter 11 is a fiduciary for the creditors, owing loyalty to the creditors and not the shareholders of the debtor.
Filing Fees – as of November 1, 2011, for Chapter 7 the fee is $306, for Chapter 11 it is $1,046, and for Chapter 13 it is $281.
First Meeting of Creditors (341 meeting) – a mandatory meeting between creditors and the debtor. It is usually held within a month of the filing of bankruptcy but often occurs later when the debtor has filed its schedules of financial information.
Fraudulent Conveyance – the transfer of valuable assets from a company which i) occurs when the company is technically insolvent, ii) renders the company insolvent, or iii) is made for less than adequate consideration. The spate of leveraged buyouts and other highly leveraged transactions in the 1980s has spurred a number of fraudulent conveyance allegations in recent years.
Fresh Start – informal term for the new accounting rules applicable to bankrupt companies. For companies that either filed for Chapter 11 after January 1991 or emerged from Chapter 11 after June 1991, assets are valued at market value rather than at historical cost.
Indemnify – to guarantee against any loss which another might suffer. In bankruptcy, it is used to describe the undertaking of one spouse in a divorce to assume certain debts of the marriage and to see that the other spouse is not forced to pay. Also called a “hold hamrless” clause.
Insider (of corporate debtor) – a director, officer or person in control of the debtor or a partnership in which the debtor is a general partner; a general partner of the debtor or a relative of a general partner, director, officer or person in control of the debtor.
Insolvency – (see also bankruptcy and failure) another term used to describe a business that is failing; generally it means that the businesses’ liabilities exceed its assets or that it is unable to satisfy its obligations as they come due.
Involuntary Bankruptcy – a bankruptcy initiated by at least three creditors holding unsecured claims aggregating at least $5,000 against the debtor. Data from the U.S. Administrative Office of the Courts subdivides bankruptcies into voluntary and involuntary.
Joint Administration – the combining of two or more bankruptcy proceedings for administrative convenience. Frequently, the cases of affiliated entities are jointly administered. Joint administration does not necessarily result in substantive consolidation. (See Substantive Consolidation.)
Lien – An interest in real or personal property which secures a debt; the lien may be voluntary, such as a mortgage in real property, or involuntary, such as a judgment lien or tax lien.
Liquidated – A debt that is for a known number of dollars is liquidated. An unliquidated debt is one where the debtor has liability, but the exact monetary measure of that liability is unknown. Tort claims are usually unliquidated until a trial fixes the amount of the liability of the tortfeasor.
Liquidated Claim – a creditor’s claim for a fixed amount of money,
Liquidation – the dissolution of a company, or individual; usually operations cease and assets are sold at auction; Chapter 7 is usually employed for liquidations, businesses or individuals.
Liquidation value – the aggregate value of a business if its assets are sold piecemeal.
Matrix (also called the Mailing Matrix) – a mailing list of Creditors prepared by the Debtor and filed with the Court. The Matrix is used as a convenient source of contact information to provide notice and documents to interested parties, particularly creditors, in a bankruptcy case.
Means Test – Added to the Code in 2005, the means test is intented to screen out those filing Chapter 7 who are supposedly able to repay some part of their debts, and must then file Chapter 13 instead. The test is found in Official Form B22. Debtors who fail the means test may convert their case to another chapter of bankruptcy.
Meeting of Creditors (also called the 341 Meeting) – The debtor must appear at a meeting before the trustee to be examined under oath about assets and liabilities. Creditors are invited but seldom attend. The meeting is sometimes called the 341 Meeting, after the section of the Bankruptcy Code that requires it.
Motion to Lift Automatic Stay – a request by a creditor to allow the creditor to take an action against a debtor or the debtor’s property that would otherwise be prohibited by the Automatic Stay.
Non Dischargeable – A debt that cannot be eliminated in bankruptcy. Non dischargeable debts remain legally enforceable despite the bankruptcy discharge.
PACER (Public Access to Court Electronic Records) – a service provided by the court system that public access to case information.
Party-in-Interest – a party who has standing to be heard by the court. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.
Perfection – When a secured creditor has taken the required steps to perfect his lien, the lien is senior to any liens that arise after perfection. A mortgage is perfected by recording it with the county clerk where the real estate is located; a lien in personal property is perfected by filing a financing statement with the county clerk. An unperfected lien is valid between the debtor and the secured creditor, but may be behind liens created later in time, but perfected earlier than the lien in question. An unperfected lien can be avoided by the trustee.
Personal Bankruptcy – filed by an individual and also called a household bankruptcy, consumer bankruptcy or wage-earner bankruptcy. (see Chapter 7 and also Chapter 13).
Personal Property – Assets, such as cars, stock, furniture, etc., that is not real estate or affixed to real property, Petition – The document that initiates a bankruptcy case. The filing of the petition constitutes an order for relief and institutes the Automatic Stay. Events are frequently described as “pre-petition,” happening before the bankruptcy petition was filed, and “post-petition,” after the bankruptcy was initiated.
Petition – (or bankruptcy petition or petition for relief) – the document that commences a bankruptcy proceeding.
Petition Preparer – a business not authorized to practice law that prepares bankruptcy petitions.
Plaintiff – a person or business that files a formal complaint with the court.
Plan (also called Bankruptcy Plan or Plan of Reorganization) – the document setting forth how a debtor plans to satisfy its creditors. The Plan of reorganization is the cornerstone of a successful Chapter 13 or Chapter 11 bankruptcy case.
Post-Petition – occurs after the filing of the Bankruptcy Petition.
Pre-Packaged Bankruptcy – a situation, often in Chapter 11 cases, where a company and its creditors agree to a plan of reorganization before the company files a bankruptcy petition. In a true prepackaged bankruptcy, a plan of reorganization is circulated and approved by creditors before the petition is filed. The court then confirms the plan and the company emerges from bankruptcy quickly.
Pre-petition – Claims or events arising before the commencement of the bankruptcy case, that is, before the filing of the bankruptcy petition. Generally only pre petition debts may be Discharged in a bankruptcy proceeding.
Preference (also called Preferential Payment)– a payment by a debtor made during a specified period (90 days or one year) prior to the filing of the Bankruptcy Petition that favors one creditor over others. Preference payments can usually be recovered and returned to the debtor’s estate.
Priority Claims – Certain debts, such as unpaid wages, spousal or child support, and taxes are elevated in the payment hierarchy under the Code. Priority claims must be paid in full before general Unsecured Claims are paid.
Priority – The Bankruptcy Code establishes the order in which claims are paid from the bankruptcy estate. All claims in a higher priority must be paid in full before claims with a lower priority receive anything. All claims with the same priority share pro rata. Claims are paid in this order – 1) costs of administration, 2) priority claims, and 3) general unsecured claims. Secured claims are paid from the proceeds of liquidating the collateral which secured the claim.
Proof of Claim – a formal demand filed by a creditor in a bankruptcy case setting out its claims against the Debtor.
Proof of claim – The form filed with the court establishing the creditor’s claim against the debtor.
Property of the estate – The property that is not exempt and belongs to the bankruptcy estate. Property of the estate is usually sold by the trustee and the claims of creditors paid from the proceeds.
Purchase Money Security Interest (also called “PMSI” pronounced “PIM-see”) – A security interest in an item established by the creditor by the fact that the creditor loaned money to the Debtor to purchase that item. The PMSI is generally established in the sales contract signed by the Debtor and the Creditor. Example – a department store has a PMSI in the television it sold to the debtor. This “lien” exists even though it is not formally recorded anywhere, as a mortgages for real estate or auto liens for cars.
Reaffirm – The debtor can chose to waive the discharge as to a debt that is reaffirmed. Generally, the parties to the reaffirmed debt have the same rights and liabilities that each had prior to the bankruptcy filing – the debtor is obligated to pay and the creditor can sue or repossess if the debtor doesn’t pay.
Receiver – a person appointed by a court to take custody of a debtor’s property or take over control of a business. Receivers are generally appointed in state court proceedings,
Relief from Stay – see Motion to Lift Automatic Stay.
Reorganization – the resolving of a Chapter 11 bankruptcy by the emergence of the debtor as a viable business. Generally, the company agrees with creditors on a plan for payment of their claims (plan of reorganization) and emerges from Chapter 11 after the plan is confirmed by the court.
Rule 2004 – (see Bankruptcy Rule 2004)
Schedules – documents submitted by the debtor along with the petition listing the debtor’s assets, liabilities, and other financial information.
Secured Creditors – a type of Creditors that has a lien on property of the Debtor. Secured Creditors enjoy some preferential treatment in a bankruptcy case over some other parties, such as Unsecured Creditors (those that do not have a lien or other secured interest in the Debtor’s property). Example – a bank that has a loan on the Debtor’s car and home is treated as a Secured Creditor. See also Unsecured Creditor.
Secured Debt – A claim secured by a lien in the debtor’s property by reason of the debtor’s agreement or an involuntary lien such as a judgment or tax lien. The creditor’s claim may be divided into a secured claim, to the extent of the value of the collateral, and an unsecured claim equal to the remainder of the total debt. Generally a secured claim must be perfected under applicable state law to be treated as a secured claim in the bankruptcy.
Set-Off – the ability to discharge or reduce a debt by applying a counter claim between the same parties. Example – a bank which has lent money to a debtor may attempt to satisfy some or all of the loan by seizing the debtor’s deposits in a savings account at that bank.
Stalking Horse – this is the name given to the party submitting the first bid to purchase assets. The stalking horse bid can be used to solicit interest from other bidders and also acts as an indicator for what will be realized on the auction floor.
Straight Bankruptcy – an informal term for a Chapter 7 bankruptcy or liquidation; used more commonly to describe liquidation before the Bankruptcy Reform Act of 1978.
Substantial Abuse – a term that refers to the abuse of the privilege to file a bankruptcy case. It usually describes fraud in cases of personal bankruptcy.
Substantive Consolidation – the combination of the estate of one debtor with the estate of one or more other debtors and the application of the combined estate to satisfy their combined liabilities. Substantive consolidation is often considered in the case of parent/subsidiary debtors and other affiliated entities.
Super-Priority Claim – an administrative claim that will be paid ahead of other administrative and priority claims.
Trustee – an agent of the court who manages the property of the debtor for the benefit of the creditors. The court appoints a trustee in most Chapter 7 cases and in Chapter 13 cases when it determines that the debtor’s management should not remain in their control. This type of trustee should be distinguished from the U.S. Trustee, who plays an administrative role in all bankruptcy cases.
United States Trustee (also called the U.S. Trustee) – an agent of the U.S. Department of Justice appointed to assist in bankruptcy cases. The U.S. Trustee administers many of the duties of the court including appointing committees, appointing trustees and examiners, scrutinizing bankruptcy documents, etc.
Unliquidated Claim – a claim for which a specific value has not been determined
Unsecured Claim – a claim or debt for which a creditor holds no special assurance of payment; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay.
Unsecured Creditor – a creditor who extended credit to a debtor without collateral security, such as a Lien or Purchase Money Security Interest. If the debtor files for bankruptcy or is levied upon, the unsecured creditors are paid on a pro-rata basis only after the claims of all secured creditors are satisfied.
Voluntary Bankruptcy – bankruptcy filed by the debtor herself.
Workout – an arrangement, outside of bankruptcy, by a debtor and its creditors for payment or re-scheduling of payments of the debtor’s obligations. Usually applies to an informal agreement between a business and its creditors, although it can be a formal agreement and it can also apply to consumer debtors.