It’s important to educate yourself about bankruptcy and the bankruptcy process. Our glossary of common bankruptcy terms was designed to help inform and familiarize others with some of the most commonly used terms you might hear during the course of a bankruptcy filing – or if you’re just curious!
We hope you find the following definitions helpful: (if we missed any terms that you are curious about let us know!)
Abandonment: Abandonment refers to a procedure in which estate property is given up, or returned to the debtor by a Trustee because the property cannot be used to payback creditors for one reason or another, and/or is considered to be a problematic asset for the bankruptcy estate to administer.
Adjustable Rate Mortgage (ARM): An adjustable rate mortgage is a paid monthly, and the amount of the payment varies according to the terms of when the loan adjusts. Adjustable rate mortgages typically adjust according to a particular index, such as the LIBOR or T-Bill index. How often the mortgage adjusts depends on the terms of the mortgage but usually adjust every 6-12 months.
Adversary Proceeding: An adversary proceeding is a lawsuit filed within the bankruptcy case, usually for the purpose of having a particular debt excluded from the bankruptcy discharge. In consumer bankruptcy cases, most adversary proceedings are filed seeking to except a debt from discharge as a result of fraudulent conduct of the debtor.
Amendment: Information that has been changed, revised, added to, or corrected in a bankruptcy filing is done by amendment.
Asset: An asset can be anything that holds value, owned either by a person or an entity. It can be property you currently possess or have an interest in, or something you are entitled to at a future date. All assets must be disclosed in a bankruptcy filing.
Assisted Person: An assisted person refers to an individual that has debts that consist mainly of consumer debts, with non-exempt property valued at $150,000.00 or less.
Automatic Stay: Probably the most powerful tool in the debtor’s arsenal, the automatic stay stops most collection actions by creditors, as well as foreclosures, utility shutoffs, and wage garnishments.
Bankruptcy: A bankruptcy is filed when someone has a severe inability to pay off his or her debts when they become due. A bankruptcy filing can relieve the individual from several types of debts; however there are also some situations which may prevent an individual from filing for bankruptcy. Contact us to learn more.
Bankruptcy Petition: The bankruptcy petition refers to the set of legal documents filed in bankruptcy court, in order to start the bankruptcy process. The filing of a bankruptcy petition imposes the automatic stay by operation of law.
Bankruptcy Trustee: A bankruptcy trustee is an individual that creditors or the U.S. Department of Justice appoints to oversee your case. The trustee’s job is to make sure a debtor complies with applicable bankruptcy law and liquidates non-exempt assets for the benefit of creditors.
Chapter 7 Bankruptcy: Sometimes called “liquidation” bankruptcy or “straight” bankruptcy, in a Chapter 7 bankruptcy filing, a trustee is appointed to the case and determines whether you have any assets that can be converted into money to pay creditors.
Chapter 13 Bankruptcy: In a Chapter 13 bankruptcy, the debtor works with a trustee to create a plan whereby the debtor pays a monthly amount to creditors to satisfy part or all of a debt obligation. It is also sometimes referred to as a “reorganization” or “wage earner plan.”
Claim: A claim is a right to paid, and can be secured or unsecured. A claim can also be contingent, unliquidated, or disputed in a bankruptcy filing.
Collateral: Collateral is a piece of property that serves as security in exchange for a lenders extension of credit.
Consumer Debt: Consumer debts are debts incurred for the care and support of the individual and his or her family. Examples include credit cards, medical debts and mortgage debts on a principal residence.
Cosigner: A cosigner is one who shares responsibility for another’s debt. The cosigner is also responsible for paying the debt if the underlying borrower stops doing so or is unable to continue to make payments.
Credit Counseling Certificate: A document that needs to be filed with the court concurrently upon the filing of the bankruptcy case. A credit counseling course must be taken prior to the bankruptcy filing. They can be completed by phone or the internet.
Credit Report: A credit report informs creditors about your credit history and borrowing risk. You can obtain a credit report annually at no charge when you go to: www.annualcreditreport.com You can also go to www.creditkarma.com for detailed information regarding how to best manage and build your credit score. The higher the credit score, the better interest rates and loans you will receive.
Current Monthly Income (CMI): Current monthly income is the combined average amount of income received from all sources within the six month before you file your bankruptcy case.
Debt: A debt is a payment or obligation that is owed to another.
Debt Relief Agency: A person or business offering assistance during a bankruptcy for a payment. Bankruptcy attorneys are considered debt relief agencies and must make certain disclosures to potential clients before the bankruptcy case can be filed.
Debtor Education Certificate: A certificate obtained at the end of a Debtor Education Course, which must be completed by an individual filing for either Chapter 7 or Chapter 13 bankruptcy.
Default: A default is non-payment of a debt that has come due. A default typically results in a lender taking some sort of legal action in attempt to collect payment.
Discharge: A discharge is a permanent injunction prohibiting creditors from attempting to collect on a debt that has been discharged in bankruptcy.
Dischargeable: A dischargeable debt is one that meets the qualifications for being eliminated permanently in a bankruptcy filing.
Disposable Monthly Income (DMI): Disposable Monthly Income refers to income remaining after the deduction of allowable reasonable expenses.
Domestic Support Obligation: A domestic support obligation is a debt owed to a spouse or former spouse, a parent or a child, or anyone who is collecting a payment on behalf of a child. It includes child support, alimony and palimony. Domestic Support Obligations cannot be discharged in a bankruptcy filing.
Equity: Equity refers to the value of an asset, minus its encumbrances.
Exemptions: A set of laws that protects real and personal property from creditors. If assets exceed available exemptions, they can be liquidated and paid to creditors.
FICO Score: FICO is your credit score. A credit score has a range between 300-850, with a higher number meaning better interest rates and a lower credit risk.
Fixed Rate Mortgage: A fixed rate mortgage is one in which the terms of the mortgage remain unchanged for the life of the loan.
Foreclosure (Mortgage Foreclosure): Foreclosure is a legal process whereby a lender takes back real property used as collateral for the loan. In CA, there is a legal process the lender must comply with in order to successfully foreclose on the property.
Garnishment: The process of taking ones wages in order to satisfy a judgment. In order to garnish wages, an order must be obtained by a judge and served on the debtor’s employer. The maximum garnishment amount is limited to 25% of the debtor’s gross paycheck.
Identity Theft: A crime in which an individual steals another person’s identity, usually to gain access to their finances and steal funds or credit.
Insolvent: A person is insolvent if they have more liabilities than they do assets.
Judicial Lien: A judgment or other type of legal proceeding that grants a lien. An example of a judicial lien includes a wage garnishment order or bank levy order.
Levy: A process whereby a court authorizes a creditor to take available funds from financial accounts owned by the debtor. A levy order can only take the funds that are in the accounts on the day that the order is served. The creditor must reapply for another levy order if the debtor account has insufficient funds to satisfy the creditors judgment.
Lien: A lien is security against collateral to ensure payment on the outstanding debt owed. A lien can be consensual (ie. A mortgage) or non consensual (ie. A garnishment, levy order or abstract of judgment.
Lien Avoidance: The process of eliminating a judicial lien from property in a bankruptcy filing. In order to avoid a lien in bankruptcy, the lien must be non-consensual and impair an exemption available to the debtor.
Lien Stripping: In a Chapter 13 bankruptcy, certain types of liens can be stripped and turned into an unsecured creditor. With lien stripping, you can eliminate consensual liens such as junior mortgages and home equity lines of credit.
Liquidation: The process of selling an asset for cash, or property that is converted into a cash equivalent.
Means Test: A formula created by Congress under the BAPCPA of 2005 that is intended to gauge a debtor’s ability to repay his debts.
Meeting of Creditors: A hearing that takes place approximately 30 days after the filing of a bankruptcy case. At this hearing, the debtor is questioned about the nature and location of his or her assets. This meeting is required under section 341 of the Bankruptcy Code.
Non-Consumer Debt: Debts that are not incurred in furtherance of the care and support of the family household. An example of a non-consumer debt is a business debt or an investment debt.
Non-Dischargeable: A claim that cannot be eliminated during the bankruptcy.
Payday Loan: A short-term loan with a high interest rate and usually for a small amount. The purpose is meant for those who need to get money quickly.
Predatory Lending: A lender who uses fraudulent means or deceptive practices when granting a loan is guilty of predatory lending. Predatory lending is often seen with subprime loans.
Preference: A preference exists when a creditor is paid money shortly before a bankruptcy filing. A bankruptcy trustee can undo this payment in order to recover “preferred” funds so all creditors receive an equal distribution on their claims. The preference period for ordinary creditors is 90 days and for insiders (ie. friends and family) it is one year.
Reaffirmation Agreement: The process in a Chapter 7 bankruptcy whereby the debtor enters into an agreement to continue to make monthly payments, even after filing. If a reaffirmation agreement is approved by the court, a future default means the debtor can still be sued for the outstanding balance.
Redemption: A process that occurs when a case is open, whereby property that has originally been intended for personal or household use, is paid the replacement value of what the property is currently worth, instead of the amount owed on the collateral. Replacement value refers to the amount a person working in a retail position would sell that particular piece of property for. The condition of the property is taken into consideration.
Repossession: The taking back of collateral after a default.
Secured Debt: A secured debt is debt secured by collateral. A mortgage is an example of a secured debt. An auto loan is also considered a secured debt, because the loan is secured, or attached to a particular vehicle.
Subprime Loan: High interest and bad term loans given to individuals who have low credit scores or poor credit histories.
Surrender: The process in a bankruptcy filing where secured collateral is returned to the lender. Any deficiency balance on the collateral is discharged in the bankruptcy case.
Unsecured Debt: Debt that is not secured by collateral, such as credit card or medical bill is referred to as an unsecured debt.
United States Bankruptcy Code: The body of law that governs bankruptcy cases filed in the United States.
If you would like more information about the common bankruptcy terms above or have any questions about bankruptcy and to find out which debt-relief option is right for you – Contact the Larkin Law Firm today!