Before filing (or even considering) bankruptcy, the best way to make an informed decision is to familiarize yourself with the terms and concepts that your case may involve.
At Buchalter & Pelphrey Attorneys At Law, we are here to distill the most important information, demystify complex concepts, and debunk common myths about bankruptcy. To that end, we have compiled a list of some of the most important terms you may hear before, during, and after bankruptcy. If you have any additional questions or wish to get started on your case, please don’t hesitate to contact our firm.
This word refers to one of the most powerful benefits of bankruptcy: the elimination of qualifying debts. When the bankruptcy court issues a debt discharge, you are no longer legally obligated to pay those debts. The debt discharge occurs at the end of your bankruptcy case (e.g. after 4-6 months for Chapter 7, or 3-5 years for Chapter 13).
Unfortunately, not all debts are dischargeable. Learn what debts can and cannot be discharged here.
2. Automatic Stay
Another benefit of bankruptcy is the automatic stay, which is a court order that prohibits creditors, lenders, and collection agencies from contacting you or attempting to collect what you owe.
Generally, the automatic stay halts and prevents:
- All types of contact (phone calls, texts, letters, etc.)
- Wage garnishment
The automatic stay does not end until your bankruptcy proceeding is complete. In some cases, however, a creditor may file a motion for relief from the automatic stay, and the court may or may not grant this relief.
The trustee is the bankruptcy estate representative. In general, they are responsible for bringing actions against parties of interest and reviewing the debtor’s petition and schedules.
They also exercise different statutory powers depending on the chapter of bankruptcy. For example, a Chapter 7 trustee will liquidate the debtor’s nonexempt property and distribute the proceeds to creditors. A Chapter 13 trustee, on the other hand, will oversee the repayment plan and disburse monthly payments.
In Chapter 7 and, in some cases, Chapter 11, the trustee will conduct a liquidation process. In other words, they will take and/or sell certain funds and assets to repay creditors by order of priority under the Bankruptcy Code.
An exemption is an asset, possession, or level of equity that you can protect from either liquidation or the Chapter 13 repayment calculation. Each state has different exemption values, and some states allow you to choose between state and federal exemptions.
If you exempt property from liquidation, the trustee cannot take and/or sell those funds or properties. If you file Chapter 13, only the value of your nonexempt assets (i.e. property you cannot exempt) will be included in your 3-5-year repayment plan.
6. No-Asset Case
A no-asset case is when the debtor can claim an exemption for everything they own. Statistically, most Chapter 7 cases are no-asset cases.
7. Means Test
To qualify for Chapter 7 bankruptcy, you must pass the means test. This is a set of calculations that includes your income, debt, assets, and other financial factors. As a rule of thumb, you will generally qualify for Chapter 7 if you make less than the median income of your household size in your state.
8. Bankruptcy Estate
When you file bankruptcy, all your legal or equitable interests (e.g. property, investments, etc.) become part of the bankruptcy estate. You may be able to shield some of these interests, however, by claiming exemptions.
When you file your petition, you will need to include schedules, which are detailed lists of your assets, liabilities, and other financial factors. Unscheduled debts cannot be discharged, even if they are considered dischargeable.
10. Joint Petition
If both you and your spouse would like to file bankruptcy, a joint petition will allow you to file bankruptcy together. A joint petition includes just one set of documents, but it outlines each of your debts and assets.
11. Debtor in Possession
You are considered the debtor in possession if you voluntarily file Chapter 11 bankruptcy and retain ownership and control over your assets and business operations.
Confirmation is when the bankruptcy judge officially approves of a reorganization, liquidation, or repayment plan. If you are a corporation filing under Chapter 11, you cannot obtain confirmation until your creditors approve of your plan.
13. Disclosure Statement
Under Chapter 11, the debtor must provide creditors with disclosure statements, which include detailed information about the debtor’s plan of reorganization. Disclosure statements are not required under Subchapter V, a new section of Chapter 11 specifically for small businesses.
14. Adversary Proceeding
Parties in interest (i.e. the debtor, trustee, and creditors) may file adversary proceedings, which are separate lawsuits within or relating to a bankruptcy case. Adversary proceedings are filed for many different reasons, such as when a creditor challenges the dischargeability of a debt, the debtor seeks to discharge student loans by proving undue hardship, or the trustee wants to regain property that the debtor transferred right before filing bankruptcy.
15. Preferential Debt Payment
Many debtors make the mistake of repaying their friends and family members right before filing bankruptcy. In the eyes of the court, these are called preferential debt payments. Preferential debt payments are prohibited because all creditors (including friends and family) must be paid by order of priority under the Bankruptcy Code—NOT by personal preference.
A lien is a legal claim to a debtor’s property.
Some liens are voluntary, such as when a homebuyer takes out a mortgage. In this case, the mortgage lender is the lienholder, and they have the contractual right to seize the home via foreclosure if the homeowner defaults on payments.
Other liens are involuntary, such as when a creditor or debt collector takes a borrower to court and obtains a judgment against them, allowing them to place a lien on their property. The IRS can place liens on taxpayers’ property without taking them to court first.
17. Secured vs. Unsecured Debt
When the debt you owe is secured, the creditor, lender, or collection agency holds a legal claim (i.e. a lien) over your property. Mortgages and automobile loans are examples of secured debt. Unpaid taxes are also considered secured debt if the IRS places a lien on the taxpayer’s property. Examples of unsecured debt, on the other hand, include credit card debt, medical bills, utility bills, and payday loans.
In bankruptcy, this distinction is critical. The bankruptcy court may discharge either secured or unsecured debt, but the discharge will not eliminate the lien. So, while a debtor may be released from liability for their mortgage debt, the mortgage lender will still be able to foreclose the debtor’s home once the automatic stay lifts.
18. Reaffirmation Agreement
In bankruptcy, debts that are not discharged may be reaffirmed. For example, a Chapter 7 filer may establish a reaffirmation agreement to continue paying an automobile loan, which will allow them to keep the vehicle (rather than lose it through repossession after the bankruptcy).
Let Our Team Answer All Your Questions
Are you struggling with debt? Bankruptcy may be on your mind, and for good reason. This debt-relief strategy can substantially improve the financial situations of individuals, families, and businesses, and our team at Buchalter & Pelphrey Attorneys At Law is here to address your concerns and conduct a thorough assessment of your circumstances. If we believe bankruptcy will allow you to overcome your financial crisis, we can guide you every step of the way.