Common Bankruptcy Terms You Need to Know
We’re going to go out of alphabetical order here in order to explain the different types, or chapters, of bankruptcy. This will give you a starting point from which to expand your knowledge.
Chapter 7: Also known as “liquidation” bankruptcy, Chapter 7 involves selling all of your nonexempt property and distributing the proceeds to your creditors. Any remaining debt (excluding student debt, most tax debt, child support, and some others) is discharged.
Chapter 13: Think of this as an extreme repayment plan. Under Chapter 13, you develop a plan to repay debts over a period of three to five years. This allows you to keep your property, including your home. This is suitable for those with regular income.
These options are open to individuals and sole proprietors. In addition, there is:
Chapter 11: This is a type of business bankruptcy that allows entities to reorganize their debt in order to pay creditors over time. This enables them to stay in business (as long as the terms are met and there is sufficient income).
Chapter 9: This reorganization option is reserved for municipalities (cities, towns, counties, taxing districts, school districts, etc.).
Chapter 12: This chapter adjusts debts of family farmers and family fishermen.
Chapter 15: Chapter 15 deals with cross-border insolvency.
Chapters 7, 13, and 11 are the most common.
Other Bankruptcy Terms to Know
Now we’ll get back to alphabetical order!
Automatic Stay: When you file bankruptcy, an injunction automatically stops creditors from attempting to collect on debts. It also stops foreclosures, lawsuits, and wage garnishments.
Bankruptcy Administrator: This court-appointed official supervises bankruptcy cases. He/she monitors plans, oversees disclosure statements, monitors’ creditors’ committees, and performs other duties related to the process.
Bankruptcy Petition: If you enter into bankruptcy voluntarily, you file the bankruptcy petition. In some cases, the petition is filed by creditors.
Claim: This is when a creditor asserts a right to payment; in other words, they demonstrate that you owe them a debt.
Credit Counseling: You must attend budget and credit counseling before filing for bankruptcy. As well, you must complete an instruction course in financial management before debts are discharged under Chapters 7 or 13.
Discharge: When your debts are discharged, you are released from personal liability for them. In other words, the creditor cannot take any action to recover the debt and they cannot communicate with you. The debts are, in other words, “clear.”
Exempt Property: When you file for bankruptcy, you are allowed to keep certain types of property. That is, it cannot be liquidated in order to pay creditors. This includes vehicles (up to a certain value), necessary clothing and household goods, pensions, a portion of equity in your home, tools of your trade (up to a certain value), and other assets.
Liquidation: Nonexempt property will be sold and the proceeds will pay your creditors.
Nondischargeable Debt: There are some debts that bankruptcy cannot eliminate. This includes child support, some taxes, student loans, and restitution you owe for criminal fines.
Nonexempt Property: When you file for bankruptcy, certain property is not protected. This includes valuable collections (e.g. vintage cars, coins, etc.), family heirlooms, cash, bank accounts, stocks, bonds, second vehicles, second homes, and vacation homes.
Plan: Your plan is a description of how you will pay creditors over a certain period of time (typically three to five years). It must be approved by the trustees and the court.
Priority: Unsecured debt (e.g. credit card debt) is “ranked” by the court to determine the order in which creditors are paid if there aren’t sufficient funds to pay all claims.
Secured Debt: This is debt that is backed by collateral of some sort. It includes mortgages and auto loans.
Trustee: A bankruptcy trustee is appointed by the court; he/she is responsible for reviewing your petition, approving your plan (if applicable), and overseeing the process of recovering property in your estate (i.e. those assets that can be liquidated).
Unsecured Debt: This is debt that is not backed by collateral. Examples include credit card debt and medical debt.
When you have to navigate the world of bankruptcy, either personal or business, there is a dictionary’s worth of other terms that you will run into. It is important to have a good working knowledge of the jargon and the process itself so you are prepared for - and not intimidated by - the proceedings into which you are entering.
If you have exhausted other options to deal with crushing debt, bankruptcy may be your last resort. Contact Robert P. Laney to learn more about the terms, the process, and whether this is the right choice for your circumstances. We are here to help you regain control, stability, and freedom.