Chapter 7 & Chapter 13 Bankruptcy Terminology
Understanding the nuances of bankruptcy when there are so many unfamiliar bankruptcy terms can be intimidating. Let our team of bankruptcy professionals help educate you on bankruptcy terminology and your options for seeking bankruptcy protection.
We offer free consultations with one of our licensed Michigan bankruptcy attorneys. At that meeting, the attorney will:
- Review your finances;
- Answer your questions and address any concerns you may have;
- Provide a comprehensive evaluation of your current circumstances and available options;
- Offer recommendations to improve your finances and credit.
Call us today at 866-261-8282 to speak to an attorney or schedule a free consultation. We are a Michigan based bankruptcy law firm with six convenient office locations: Detroit, Southfield, Flint, Dearborn, Ann Arbor and Warren.
Adversary Proceeding: A lawsuit filed in the bankruptcy court that 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.
Automatic Stay: The injunction issued automatically upon the filing of a bankruptcy case that prohibits collection actions against the debtor, the debtor's property or the property of the estate.
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 to recover certain transfers of property such as preferences or fraudulent transfers or to void liens created before the commencement of a bankruptcy case.
Bankruptcy Code: Title 11 of the United States Code governs bankruptcy proceedings. Bankruptcy is a matter of federal law and is, with the exception of exemptions, the same in every state. When federal bankruptcy law conflicts with state law, federal law controls.
Cash for Keys: This is an option the lender may offer typically after the foreclosure process is complete. If you have exhausted all your options and saving your home is no longer possible, your lender may offer you a fee to walk away from the home peacefully and potentially before the expiration of the six month redemption period.. Unless your lender offers this automatically, this is something that will need to be negotiated with them. In general, lenders will offer about 1% of your home's value if you are willing to walk away quickly and peacefully.
Chapter 13: Chapter 13 is reorganization, repayment program through the court. It is a way of legally stopping creditor actions (i.e., harassing phone calls, garnishments, vehicle repossessions, foreclosure, etc.) and setting up repayment terms with your creditors. Through the Chapter 13 process, we develop and submit to the court a customized repayment plan that fits your circumstances. The purpose of the plan is to get you back on track with your creditors and set up reasonable repayment terms to allow you to protect your property, like a home that is in foreclosure. A temporary disruption in income (i.e. due to medical reason or layoff from work) or changes in circumstances (i.e. divorce, loss of overtime, etc.) are the primary reasons we see our clients filing for protection under Chapter 13.
Filing for Chapter 13 is nothing to be ashamed of. Good people often find themselves in tough circumstances that they did not anticipate and this program is designed to provide a personal strategy to pay back debts in a reasonable manner and timeframe.
Chapter 7: Chapter 7, often called a "straight" bankruptcy, is usually the best remedy for people who primarily have unsecured debts they cannot repay at this time or in the near future. In most cases, the debtors can work out an arrangement to keep their vehicles and homes.
Charge-off: The removal of a debt from the accounting of a company. This type will be classified as 'bad debt expense' on the income statement, and removed from the balance sheet. The charge-off in no way eliminates the obligation of the debtor to repay the debt, it simply means that the lender believes that they will not be able to collect. Charge-offs has a negative impact on a person's credit score.
Collateral: The property that 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 court order that makes the terms of the plan for repayment of debts in a Chapter 11, 12 or 13 binding. The terms of the confirmed plan replace the prepetition rights of the debtor and creditor.
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 that governs it changes, it remains the same case as originally filed.
Credit Score: A statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person's past credit history. It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be.
Creditor: The person or organization to whom the debtor owes money or has some other form of legal obligation.
Debtor: The debtor is the entity (person, partnership or corporation) who is liable for debts, and who is the subject of a bankruptcy case.
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.
Deed in Lieu of Foreclosure: A process in which the mortgage company voluntarily agrees to take a home back without following through on foreclosure proceedings.
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 continue for the benefit of creditors.
Discharge: The legal elimination of debt through a bankruptcy case. When a debt is discharged, it is no longer legally enforceable against the debtor, though any lien that secures the debt may survive the bankruptcy case.
Dischargeable: Debts that can be eliminated in bankruptcy. Certain debts are not dischargeable; that is, they may not be discharged through bankruptcy or may only be discharged through Chapter 13. Family support and criminal restitution are examples of debts that cannot be discharged. Debts incurred by fraud can only be discharged in Chapter 13.
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. Debtors could have the right to re-file a bankruptcy after a case dismissal.
Escrow: The funds reserved by a mortgage lender for the future payment or property taxes and homeowners insurance.
Escrow Acceleration: This occurs when the mortgage company advances or pays for property taxes and/or homeowners insurance that they have not previously collected through the monthly mortgage payments. They then increase the debtor's monthly mortgage payment to recoup these funds.
Exempt: 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 or her state. The debtor gets to keep exempt property for use in making a fresh start after bankruptcy.
Exemptions: Exemptions are the lists of the kinds and values of property that is legally beyond the reach of creditors or the bankruptcy trustee. 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.
Foreclosure: The legal process in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) after the owner has failed to comply with an agreement between the lender and borrower called a "mortgage" or "deed of trust." Commonly, the violation of the mortgage is a default in payment of a promissory note secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien."
Garnishment: A legal proceeding where a person's money in control of another (such as salary) is taken for payment of a debt. The amount that may be taken is set by statute (usually as a percentage), and, in most states, a judgment is necessary before garnishment.
General, Unsecured Claim: Creditor's claim without a priority for payment for which the creditor holds no security (or collateral). If the available funds in the estate extend to payment of unsecured claims, the claims are paid in proportion to the size of the claim relative to the total of claims in the class of unsecured claims.
Hardship Discharge: This is a separate proceeding filed with the court to seek discharge of debts that are typically not eligible for discharge (such as student loans) based on a change in circumstances where you believe that you cannot reasonably pay back the debt.
Judgment: When a creditor seeks a formal decision by a court of law in order to create or affirm an obligation, such as a debt. This is obtained so the creditor can take further actions to collect on the debt, such as a wage garnishment, lien against personal or real property, etc.
Lien: An interest in real or personal property that 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.
Lien Stripping: When a secured debt obligation, such as a second mortgage, is converted to an unsecured debt obligation due to a depreciation of the asset.
Liquidated: A debt is liquidated when the amount owing is a fixed, determined amount. 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 tort-feasor.
Loan Deficiency: The balance of a loan that is unpaid after the collateral has been sold and the proceeds from the sale have been applied to the loan balance.
Means Test: The required analysis to determine if an individual or household has discretionary income available to pay unsecured debts after secured debts and monthly living expenses (based on IRS standards) have been paid. This is required if the individual or household is over the median income.
Median Income: The median income of all households in the geographic area. The median is the middle value when all are arranged from highest to lowest. Whether you are above or below the median income is determined based on your household income and family size within your state.
Negative Equity: When the amount that you owe on a secured debt obligation, such as a home or vehicle, is worth less than the secured lien.
Non Dischargeable: A debt that cannot be eliminated in bankruptcy. Non-dischargeable debts remain legally enforceable despite the bankruptcy discharge. Examples of such debts are state or federal fines and penalties, such as traffic infractions, most student loans, current tax liabilities, etc.
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 recorder; a lien in personal property is perfected by filing a financing statement with the secretary of state. 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 Property: Property that is not real property or affixed to real property, such as cars, stocks, furniture, etc.
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 "prepetition," happening before the bankruptcy petition was filed, and "post petition," after the bankruptcy is filed.
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: A transfer to a creditor in payment of an existing debt made within certain time periods before the commencement of the case. Preferences may be recovered by the trustee for the benefit of all creditors of the estate.
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) secured claims 3) priority claims and 4) general unsecured claims. Secured claims are paid from the proceeds of liquidating the collateral that secured the claim.
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.
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.
Reaffirm: The debtor can chose to reaffirm debts that would otherwise be discharged by the bankruptcy. Generally, when a debt is reaffirmed, 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 does not pay.
Redemption Period: The 6 to 12 month period following a foreclosure sale where the debtor has the right to take the property back by paying off the lien holders in full.
Relief from Stay: A creditor can ask the judge to lift the automatic stay and permit some action against the debtor or the property of the estate. If the motion is granted, the moving party (but no one else) is free to take whatever action the court permits. Relief can be absolute, for example, permitting the creditor to foreclose on property, or limited, as for example, allowing the recordation of a notice of default.
Repossession: This occurs when the lien holder takes back the collateral (such as vehicle repossession) due to missed payments. The lien holder will sell the collateral, such as at an auction, and bill the debtor for the difference between the balance of the contract and the actual sale price of the collateral plus any administrative costs.
Sarah & Jim from Farmington Hills, Michigan: We would like to say thank you to Acclaim Legal Services - especially to Cindy Millns and Christopher Jones for helping us with the Chapter 13 process.
We appreciate all that you have done for us - you were always there to answer any questions that we had and to get back to us very quickly. We highly recommend your firm to others.
Schedules: The debtor must file the required lists of assets and liabilities to commence a bankruptcy case, collectively called the schedules.
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.
Sheriff’s Sale: This is another term for a foreclosure . It is the date where the property is put up for public auction for third parties to bid on. If it is not purchased by a third party, the property goes back to the bank.
Short Sale: Bank voluntarily agrees to sell the home to a third-party for less than what you owe on it.
Tax Forfeiture: The loss of an asset, or rights to an asset, as a result of defaulting on contractual obligations or conditions.
Trustee: The court appoints a trustee in every Chapter 7 and Chapter 13 case to review the debtor's schedules and represent the interests of the creditors in the bankruptcy case. The role of the trustee is different under the different chapters.
Unsecured: A claim or debt is unsecured if there is no collateral that is security for the debt. Most consumer debts are unsecured.