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Understanding Bankruptcy


Glossary

Bankruptcy is a complex subject and, to understand it, you will need to become familiar with a variety of technical terms and abbreviations, many of which have specific legal meanings. To help you, I have created this comprehensive glossary, containing definitions for the most important bankruptcy-related words you are likely to encounter.

The glossary contains 143 entries, 39 of which are basic terms that I have explained in detail in Understanding Bankruptcy. For more information about these basic terms, just look for a link (for example, [14]) showing the number of the section where that term is discussed. Just click on the link to jump to the exact place in the text where that particular term is explained.

#


341 meeting: A meeting of creditors, required by Section 341 of the Bankruptcy Code, at which the debtor is questioned about his or her financial affairs. Also called a creditors' meeting.

A


adversary proceeding: In the American legal system, a lawsuit filed by one party against another. With respect to bankruptcy, in order to attempt to discharge a student loan a debtor must use an adversary preceding to initiate a lawsuit separate from the main bankruptcy filing.  [12]

asset: Something of value, owned by a person or an organization, that can be used to pay a debt or honor a financial obligation.  [2]

assume: [verb] To continue to perform duties specified by a contract or lease.

automatic stay: With respect to a debtor who has filed for bankruptcy: An injunction that stops all lawsuits, foreclosures, garnishments, and collection activity against the debtor the moment the bankruptcy petition is filed.

B


bankruptcy : A legal procedure, used by people, companies and governments that are insolvent, to be released from all or part of their debts.  [2]

Bankruptcy Act [of 1898]: Informal name for the National Bankruptcy Act of 1898. The first permanent U.S. bankruptcy law, the Bankruptcy Act served as the basis of American bankruptcy law for 40 years, until it was overhauled in 1938 by the Chandler Act.  [7]

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Also known as BAPCPA. A complex set of new regulations that created sweeping changes to the U.S. bankruptcy system, affecting both individuals and businesses. BAPCPA increased the costs of bankruptcy to individuals, while decreasing the benefits. Specifically, BAPCPA made it more difficult to file for bankruptcy, discharge debts (including all student loans), and file for bankruptcy more than once. BAPCPA also increased paperwork requirements, increased filing fees, and mandated that individuals filing for bankruptcy would be required to take a course in credit counseling and financial management.  [8]

bankruptcy code: In the United States, an informal name for federal bankruptcy law as codified in Title 11 of the U.S. Code. See also U.S. Code.

bankruptcy court: In the United States, a unit of the district court consisting of the group of bankruptcy judges active in that district.

bankruptcy estate: All property owned by the debtor at the time of the bankruptcy filing. The bankruptcy estate includes all assets in which the debtor has a financial interest, even property that may be owned by another person.

bankruptcy judge: A judicial officer of the United States district court who is the court official with decision-making power over federal bankruptcy cases.

bankruptcy petition: The document, filed with (submitted to) the court, that opens a bankruptcy case. In a voluntary bankruptcy, the bankruptcy petition is filed by the debtor. In a involuntary bankruptcy, the bankruptcy petition is filed by creditors.

bankruptcy trustee: A licensed professional or corporation charged with the task of coordinating the bankruptcy process under the supervision of a bankruptcy court.  [2]

Bankruptcy Act of 1800: The first American federal bankruptcy law, modeled after the British laws in effect at the time. The Bankruptcy Act of 1800 made it possible, for the first time, for U.S. citizens to be declared legally insolvent. However, this right lasted only three years, as the law was repealed in 1803.  [6]

Bankruptcy Reform Act [of 1978]: A major overhaul of the entire bankruptcy system, containing many technical and procedural changes. In addition to these changes, the Bankruptcy Reform Act abolished the right to discharge government student loans as part of a bankruptcy filing. (Private student loans could still be discharged until 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was passed.)  [7]

BAPCPA: Abbreviation for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Brunner test: A set of three criteria, sometimes used by bankruptcy judges to determine if an individual filing for bankruptcy is eligible to discharge a student loan. (The name comes from a 1987 court case involving a debtor named Marie Brunner.)  [12]

budget: An organized plan describing how money is to be spent and, possibly, how other assets are to be used, over a specific period of time.

C


Chandler Act [of 1938]: A major amendment to the National Bankruptcy Act of 1898, making it easier for individuals and companies to go bankrupt voluntarily, and providing a new alternative to total liquidation (a company in debt now had the option to reorganize its finances and stay in business). With the passing of the Chandler Act, U.S. bankruptcy law became so stable that the next major change did not take place until for 40 years, in 1978.  [7]

Chapter: The U.S. Code (the definitive compilation of all "general and permanent" U.S. federal laws) is divided into 51 major subdivisions called Titles, each title being divided into Chapters. Bankruptcy law is contained within the various Chapters that comprise Title 11.  [9]

Chapter 7:

  1. Within Title 11 of the the U.S. Code, the laws describing bankruptcy procedures, for an individual or a company, based upon the liquidation of assets.  [10]  [9]
  2. Informally, used to refer to a bankruptcy filed under the auspices of the Chapter 7 law. Example: "A friend of mine lost his job when the company he was working for liquidated by filing for Chapter 7."

Chapter 9: Within Title 11 of the the U.S. Code, the laws describing bankruptcy procedures for a municipality.  [9]

Chapter 11:

  1. Within Title 11 of the the U.S. Code, the laws describing bankruptcy procedures, for an individual or a company, based upon the liquidation of assets.  [11]  [9]
  2. Informally, used to refer to a bankruptcy filed under the auspices of the Chapter 11 law. Example: "The ABC company filed for Chapter 11 so they could reorganize and still remain in business."

Chapter 12: Within Title 11 of the the U.S. Code, the laws describing bankruptcy procedures for a family farmer or fisherman based upon a reorganization of financial obligations and operations.  [9]

Chapter 13:

  1. Within Title 11 of the the U.S. Code, the laws describing bankruptcy procedures for an individual based upon a reorganization of financial obligations and operations.  [11]  [9]
  2. Informally, used to refer to a bankruptcy filed under the auspices of the Chapter 13 law. Example: "My brother-in-law used Chapter 13 to reorganize his finances and reduce his debts."

claim: A formal assertion of a right of a creditor to receive payment from a debtor or from the debtor's property.

confirmation: The formal approval of a bankruptcy judge for a specific plan of liquidation, payment schedule, or reorganization.

consumer debt: A debt incurred for personal, as opposed to business, needs. Specifically, a debt incurred by an individual for a personal, family, or household purpose.

consumer debtor: A debtor whose debts are mostly consumer debts.

contingent claim: A claim that would be owed by a debtor under specific circumstances. For example, if the debtor is a cosigner on someone else's loan and that person fails to pay, it is considered a contingent claim.

credit counseling: A course of instruction teaching individuals how to use money well, including money management, budgeting, and similar topics. In the United States, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 mandates that an individual filing for personal bankruptcy must complete a credit counseling course in "personal financial management", before his or her debts can be discharged.

credit rating: With respect to a particular person or organization, a numerical measure of credit worthiness. In the United States, credit reports for individuals are compiled by a variety of agencies, the three largest being Experian, Equifax, and TransUnion.

credit worthiness: With respect to a particular person or organization, the ability to pay back borrowed money.

creditor: A person or organization to whom money, goods or services are owed. Compare to debtor.  [2]

creditor's meeting: A meeting of creditors, required by section 341 of the Bankruptcy Code, at which the debtor is questioned about his or her financial affairs. Also called a 341 meeting.

creditors meeting: The meeting of creditors, required by Section 341 of the Bankruptcy Code, at which the debtor is questioned about his or her financial affairs. Also called a 341 meeting.

current monthly income: The average monthly income received by a debtor over the six calendar months preceding the filing of his or her bankruptcy case.

D


debt: Something that is owed, usually money, sometimes goods or services.  [2]

debt bondage: In the ancient Greek city states and early Roman Empire, forcing a debtor who could not meet his obligations to become a slave to his creditor.  [3]

debtor: A person or organization that owes money, goods or services. Compare to creditor.  [2]

debtors prison: During historical times, in various places where bankruptcy was not available, prisons in which insolvent debtors were confined, often in a brutal and inhumane manner.  [3]

discharge: [verb] To eliminate a debt as part of a bankruptcy process.

discharged: Describes a debt that was eliminated as part of a bankruptcy process. Discharged debts do not need to be paid back.  [3]

dischargeable debt: A debt that, by law, may be eliminated as part of a bankruptcy process. Compare to nondischargeable debt.

disclosure statement: A written statement, prepared by a debtor filing for bankruptcy by reorganization (Chapter 11 or Chapter 13), providing "adequate information" to creditors, so they can evaluate the the proposed reorganization plan.

disposable income: For an individual filing for bankruptcy: the portion of the debtor's income not necessary for supporting the debtor and his dependents. For a company filing for bankruptcy: the portion of the company's income not necessary for meeting ordinary operating expenses.

E


emerge: [verb] With respect to a company that has filed for bankruptcy based on reorganization (such as Chapter 11 bankruptcy in the United States): To end the bankruptcy process such that the company changes back into a regular, non- bankrupt business.  [11]

equity: The net value of a debtor's property. To calculate equity, you take the the total value of the property and subtract whatever is owed to creditors (for example, liens). Example: A debtor owns a house with a total value of $200,000. The house has a $150,000 mortgage. The equity is $50,000 ($200,000-$150,000).

executory contract: In bankruptcy law, a contract in which continuing obligations exist on both sides of the contract. A lease, for example, is an executory contract. Subject to the approval of the bankruptcy court, a trustee may choose to assume or reject executory contracts. For example, bankruptcy can be used to cancel leases.

exempt property: With respect to a bankruptcy, specific types of assets that cannot be taken away from a debtor during the bankruptcy process, even as part of a liquidation. For example, in the United States, an individual debtor filing for bankruptcy is, by law, allowed to keep his car, his clothing, and his pension.  [10]

F


file: [verb] To initiate a bankruptcy procedure.  [2]

fresh start: Informally, the relief provided to an individual who has filed for bankruptcy, once his debts have been discharged. Such a person is now able to live his life free from the burden of oppressive debts.  [3]

G


government student loan: In the United States, a student loan that is issued or guaranteed by the federal government. Examples are Direct Loans, Perkins Loans, and Stafford Loans. Government loans have lower interest rates and more flexible terms than do private student loans. However, government loans have strict limits as to how much money can be borrowed. Compare to private student loan.  [12]

garnishment: A legal procedure, requiring a third party to withhold money owed to a debtor and pay it instead to a creditor. The most common garnishment is a wage garnishment, in which part of the debtor's earnings are withheld by his or her employer. The amount withheld is then paid directly to the creditor.

good faith effort: A sustained effort, made with the deliberate intention of producing a required result.

H


I


insider: A person or business entity that is closely connected to a debtor who has filed for bankruptcy. Specifically, in the United States:

  1. When an individual has filed for bankruptcy, an insider is: a relative; a general partner; a partnership in which the debtor is a general partner; or a company in which the debtor is a director, officer, or person in control.
  2. When a company has filed for bankruptcy, an insider is: a general partner of the company; a director, officer, or person in control of the company; a relative of a general partner, director, officer, or person in control of the company; or a partnership in which the company is a general partner.

insolvent: Describes a debtor who owes more money than the value of his assets.  [2]

involuntary bankruptcy: A bankruptcy initiated by a petition filed by one of the creditors. Compare to voluntary bankruptcy.

J


joint administration: A court-approved agreement under which two or more bankruptcy filings are administered together as one combined case. As long as there are no conflicts of interest, the two individuals or companies are allowed to combine their resources, hire the same trustee, and so on.

joint petition: A bankruptcy petition filed together by a husband and wife. See also substantive consolidation.

K


L


lien: A legal claim serving as security for a money owed or for an outstanding obligation. For example, if a contractor was not paid for work he performed on a property, he may go to court to get a lien against the property. Once the lien has been granted, the property may not be sold until the contractor is paid.

liquidated claim: A creditor's claim for a specific amount of money. (If the value of the claim has not yet been determined, it is called an unliquidated claim.)

liquidation: A process by which the financial debts of an individual or a company are settled by selling the assets of the debtor. The money thus raised is then used to pay back the creditors as much as possible. In the United States, liquidation is the basis of Chapter 7 bankruptcy.  [10]

litigation: A civil lawsuit; a legal action mandating a series of steps that may lead to a court trial.

LRC: Abbreviation for the Office of the Law Revision Counsel of the U.S. House of Representatives. The department of the U.S. government that organizes and consolidates all "general and permanent" U.S. federal laws into a huge compilation called the U.S. Code.  [9]

M


means test: Specific criteria applied to an individual filing for Chapter 7 (liquidation) bankruptcy in order to determine whether or not he or she qualifies for that type of bankruptcy. If the person cannot pass the means test, the bankruptcy will either be converted to Chapter 13 (reorganization) or will be dismissed outright. The means test was mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Until then, insolvent debtors were allowed to choose either Chapter 7 or Chapter 13. The idea that a debtor must prove that he or she is eligible for Chapter 7 is referred to as the presumption of abuse.

motion to lift the automatic stay: A request by a creditor to allow legal action against a debtor that would otherwise be prohibited by an automatic stay. When a debtor is insolvent, the act of filing for bankruptcy immediately stops all lawsuits, foreclosures, garnishments, and collection activity against the debtor (the "automatic stay"). A creditor can file a motion to lift the automatic stay if he wishes to, say, continue with a foreclosure or garnishment.

N


National Bankruptcy Act of 1898: The first permanent U.S. bankruptcy law; referred to, more simply, as the Bankruptcy Act. The Bankruptcy Act served as the basis of U.S. bankruptcy law for 40 years, until it was overhauled in 1938 by the Chandler Act. [7]

no-asset case: A Chapter 7 (liquidation) bankruptcy in which there are no assets to pay any portion of the unsecured claims.

nondischargeable debt: A debt that, by law, may be not eliminated as part of a bankruptcy process. In the United States, nondischargeable debts include: home mortgages, student loans, alimony, child support, certain taxes, criminal restitution, criminal fines, as well as debts arising from death or injury caused by driving under the influence of alcohol or other drugs. Compare to dischargeable debt.

O


objection to dischargeability: As part of a bankruptcy proceeding, a legal objection made by a creditor or by a trustee to disallow a debtor being released from personal liability for certain debts that would otherwise be discharged. This type of objection can be used, for example, if a creditor suspects that the debtor has lied about the nature of the debt.

objection to exemptions: As part of a bankruptcy proceeding, a legal objection made by a creditor or by a trustee to object to the debtor's attempt to claim certain property as exempt from liquidation. See exempt property.

Office of the Law Revision Counsel of the U.S. House of Representatives: Also known as the LRC. The department of the U.S. government that organizes and consolidates all "general and permanent" U.S. federal laws into a huge compilation called the U.S. Code.  [9]

P


party in interest: With respect to a matter that must be settled in a bankruptcy case: any person or entity who has standing to be heard by the court. The debtor, creditor, and trustee are all parties of interest. Others may qualify depending on the circumstances.

petition: The document, filed with (submitted to) the court, that opens a bankruptcy case. In a voluntary bankruptcy, the bankruptcy petition is filed by the debtor. In a involuntary bankruptcy, the bankruptcy petition is filed by creditors.

petition preparer: A person or business that prepares bankruptcy petitions, but does not otherwise practice law.

plan: More formally, a repayment plan. A detailed description of how a debtor proposes to pay the creditor's claims over a specified period of time. Such plans are required of individuals who file for Chapter 13 (reorganization) bankruptcy.

pre-bankruptcy planning: Organizing a debtor's property to allow the debtor to take maximum advantage of exemptions. For example, pre-bankruptcy planning might convert nonexempt assets into exempt assets.

preferential debt payment: With respect to a bankruptcy, a debt payment made to a creditor, 90 days or less before the bankruptcy filing, that gives the creditor more than he would have received as part of the bankruptcy settlement. (If the debtor is an insider, the time frame is one year or less.)

presumption of abuse: The idea behind that mandate that individuals are not allowed to file for Chapter 7 (liquidation) bankruptcy until they pass a means test. The doctrine of presumption of abuse was introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. See also means test.

priority: As specified by bankruptcy law, the ranking of unsecured claims that determines the order in which such claims are to be paid.

priority claim: Same as priority debt.

priority debt: Specific types of debts that must be paid back before any other debts. Creditors who hold non-priority debts will not receive anything unless there is more than enough money to pay back all the priority debts in full. Example: In the United States, when an individual files for a Chapter 7 (liquidation) bankruptcy, priority debts include: taxes and other government debts, child support, alimony, student loans, and criminal restitution. When a company files for Chapter 7, priority debts include taxes and other government debts, salaries (subject to fixed limits), and contributions to employee benefit plans.  [10]

private student loan: In the United States, a student loan that is made by non-government lender, such as a bank or Sallie Mae (a large, private student loan company). Because government loans have strict limits as to how much money can be borrowed, many students are forced to take out private loans to supplement the financial aid offered by their school and by the government. Compare to government student loan.  [12]

proof of claim: A written statement (using a standard form, along with verifying documentation) used to prove that a debtor owes money to the creditor. In a bankruptcy proceeding, each creditor must file a formal proof of claim.

property of the estate: All assets owned by a debtor at the commencement of a bankruptcy case.

protection: With respect to a company that has filed for bankruptcy based on reorganization (such as Chapter 11 bankruptcy in the United States): The legal status that makes it possible for the company to operate under the supervision of a bankruptcy court. Example: "Once a company files for Chapter 11, its debts are put on hold, which enables it to operate under the protection of the court."  [11]

Q


R


reorganization: A process by which the financial debts of an individual or a company are settled by negotiating with the creditors to reorganize the debtor's finances and to reschedule the payment of all or part of the debt. In the United States, reorganization is the basis of Chapter 13 bankruptcy (for individuals) and Chapter 11 (for companies).  [11]

repayment plan: A formal, detailed description of how a debtor proposes to pay the creditor's claims over a specified period of time. Such plans are required of individuals who file for Chapter 13 (reorganization) bankruptcy.

reaffirmation agreement: An agreement, made by a debtor who has filed for Chapter 7 (liquidation) bankruptcy, to continue paying a specific debt that would normally be discharged. Such agreements are usually made so that the debtor will be able to keep property that he or she would otherwise lose. For example, a debtor may agree to keep making payments on a car to avoid losing the car.

repudiate a debt: To cancel a debt.

reschedule a loan: To change the terms of an existing loan in order to extend the repayment period.

Robert Morris (1734-1806): In the early days of the United States, the most prominent American to become insolvent. For many years, Morris was a wealthy, powerful, highly regarded statesman. In the late 1790s, however, he lost a great deal of money and in 1798, at age 64, Morris was sent to debtor's prison for three and a half years. Morris' imprisonment was one of the main reasons that, two years later (in 1800), the U.S. government enacted the nation's first federal bankruptcy law.  [5]

S


schedule: An official form, filed by a debtor as part of a bankruptcy petition, showing the debtor's financial information, including assets and liabilities.

secured claim: With respect to a bankruptcy, a claim based upon a secured debt. Secured claims have a higher priority than unsecured claims because the creditor has the right to seize the property that serves as the collateral. Compare to unsecured claim.

secured creditor: A creditor who has a secured claim against a debtor. Compare to unsecured creditor.

secured debt: A debt backed by an underlying asset that acts as collateral. With a secured debt, the creditor has the right to seize the collateral if the debt is not paid. Examples: a mortgage (the collateral is the property being mortgaged); an auto loan (the collateral is the automobile). When a lien is placed against something of value, the debt for which the lien is created becomes a secured debt. Compare to unsecured debt.

small business case: A special type of Chapter 11 (reorganization) bankruptcy designed to reduce the time a small business must stay in bankruptcy. With a small business case, there is no creditors' committee. However, the debtor is subject to increased oversight by the bankruptcy trustee.

statement of financial affairs: As part of a bankruptcy filing, a series of questions the debtor must answer in writing, using an official form, describing important financial information. Such information includes sources of income, transfers of property, and lawsuits by creditors.

statement of intention: In a Chapter 7 (liquidation) bankruptcy, a declaration made by the debtor describing what will be done with all secured property (for example, a house or a car), as well as any unexpired leases.

substantive consolidation: In a bankruptcy proceeding, combining the assets and liabilities of two or more related debtors into a single pool to pay creditors. Bankruptcy courts are often reluctant to allow substantive consolidation, because any benefit to one set of creditors will cause harm to the other set of creditors. See also joint petition.

T


trustee: A licensed professional or corporation charged with the task of coordinating the bankruptcy process under the supervision of a bankruptcy court. Same as bankruptcy trustee.  [2]

Title: One of 51 major divisions of the U.S. Code, the definitive compilation of all "general and permanent" U.S. federal laws. Bankruptcy law is contained in Title 11.  [9]

transfer: Any means by which a debtor disposes of property.

U


U.S. Trustee: An officer of the United States Justice Department, responsible for supervising the administration of bankruptcy cases, as well as estates and trustees.

undue hardship: In the United States, with respect to a debtor who owes money for a student loan, one of the criteria which must be met for the debtor to be able to discharge the loan. In this context, "undue hardship" is not defined explicitly by law. Thus, a finding of undue hardship is left to the discretion of the presiding bankruptcy judge. See also Brunner test.

United States Code: Same as U.S. Code.

unscheduled debt: A debt that should have been listed by the debtor in the schedules that were filed with the court, but was not. An unscheduled debt may or may not be discharged, depending on the circumstances.

unsecured claim: With respect to a bankruptcy, a claim based upon an unsecured debt; that is, debt that is not backed by an underlying asset (collateral). Unsecured claims have a lower priority than secured claims, because there is no property which the creditors are able to seize. Compare to secured claim.

unsecured creditor: A creditor who has an unsecured claim against a debtor. Compare to secured creditor.

unsecured debt: A debt that is not backed by an underlying asset (collateral). Compare to secured debt.

unliquidated claim: A creditor's claim where the specific value has not yet been determined. (If the value of the claim is known, it is is called a liquidated claim.)

U.S. Code: More formally, the "The Code of Laws of the United States of America". Also known as the United States Code. The definitive compilation of all "general and permanent" U.S. federal laws, compiled and published by the LRC (Office of the Law Revision Counsel of the U.S. House of Representatives). The U.S. Code is divided into 51 broad subject areas, referred to as Titles; each Title, in turn, is subdivided into Chapters. Bankruptcy law is contained in Title 11. The various types of bankruptcy are often referred to by their Chapter numbers. The most common are Chapter 7 (liquidation), Chapter 11 (reorganization for companies), and Chapter 13 (reorganization for individuals).  [9]

V


voluntary bankruptcy: A bankruptcy initiated by a petition filed by the debtor. Compare to involuntary bankruptcy.

voluntary transfer: A transfer of a debtor's property made with consent of the debtor.

W


wage garnishment: A legal procedure ordering an employer to withhold part of a debtor's earnings. The amount withheld is then paid directly to a creditor.

X


Y


Z


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