Common Bankruptcy Terms

If you’re considering filing for bankruptcy, you’ve likely been doing a lot of reading and research. But you’re not a bankruptcy lawyer so a lot of the terms around the bankruptcy process are unfamiliar to a layperson. That can make learning if bankruptcy is the right decision for you harder than it already is. We want to make your life and decision easier by explaining some of the most common terms and phrases associated with bankruptcy. 

We’re listing Chapter 7 and Chapter 13 right at the top since knowing which kind of bankruptcy is right for you is the best place to start your research and these two types of bankruptcy are the most common for consumers.

Chapter 7 Bankruptcy: This type of bankruptcy forgives most kinds of unsecured debt like credit card and medical debt. You do not have to make a payment plan to pay any unsecured debts back but you may be required by the court to sell some belongings to pay back some creditors.

Chapter 13 Bankruptcy: This type of bankruptcy is for those who have a steady income and can afford to pay back some of their debt through a repayment plan.

Adversary Proceeding: A lawsuit filed in the bankruptcy court relating to a debtor’s case. Typically the suits are filed to determine if a debt is dischargeable and if a lien filed against a debtor is valid.

Automatic Stay: A court order that immediately halts things like foreclosure, wage, and bank account garnishment, and phone calls and letters from debt collectors. A stay goes into effect as soon as you file your bankruptcy petition.

Bankruptcy Court: A federal court where bankruptcy cases are filed and administered. This is where the disputes in a bankruptcy case will be heard and where the discharge order will be issued at the end of your case.

Cram Down: In Chapter 13, if you owe a lot more on your vehicle loan that the vehicle’s replacement value, you can propose to pay just the value of the car. At the end of Chapter 13, the discharge will wipe out the balance of the vehicle loan.

Credit Counseling: A class required to help you determine if bankruptcy is the right decision for you. The class can be taken online making it very convenient.

Creditor: Those you owe money to.

Debtor: Those who owe money.

Discharge: This is what wipes out your debts under bankruptcy. A discharge also forbids creditors from those discharged debts from contacting you in any way regarding those debts anytime in the future.

Domestic Support Obligation: Debts related to alimony, maintenance or support owed to a child or spouse. These debts are not dischargeable under bankruptcy.

Exempt Assets: These are your assets not included in your bankruptcy filing meaning you don’t have to liquidate them.

Inside the Plan: This is a term sometimes used in Chapter 13 bankruptcy cases. If a debt is paid inside the plan, it means the debt will be paid through your Chapter 13. If a debt is left outside the plan, you will make the payments on it yourself.

Lien: An interest in real or personal property that secures a debt. Some liens are voluntary like a mortgage and some are involuntary like a tax lien.

Liquidation: Selling off your assets so the proceeds can be used to pay your creditors.

Means Test: The test uses certain criteria to decide if a person can file for Chapter 7 bankruptcy for a full discharge of their debts. Those determined to have too much income after deducting certain expenses will not be allowed to file unless they can qualify as an exception.

Meeting of Creditors AKA The 341 Meeting: The person who filed for bankruptcy must attend a meeting with the trustee and answer questions under oath about their assets and liabilities. Creditors are invited to attend but seldom do.

Motion to Dismiss: This motion is filed typically under Chapter 13 by the trustee asking the judge to dismiss the case. This usually happens when the debtor hasn’t made their Chapter 13 payments or the trustee believes the Chapter 13 plan doesn’t comply with the rules or if too little money will be paid to certain creditors.

Nonexempt Assets: These are assets included in your bankruptcy filing that can be liquidated to pay creditors.

Petition: This is the first form you will fill out to begin the bankruptcy process.

Proof of Claim: The form a creditor files with the court to establish a claim against the debtor.

Schedules: The debtor is required to file lists of assets and liabilities to begin a bankruptcy case, these lists are collectively known as schedules. 

Secured Debt: This type of debt is secured by collateral. The collateral on your vehicle loan is your vehicle, the collateral on your mortgage is your home for example. Typically secured debts are not fully discharged during bankruptcy. Creditors can repossess their collateral if you fail to make your payments.

Trustee: This person is responsible for overseeing the process of your bankruptcy and is appointed by the court.

Unsecured Debt: Debt not backed by collateral. This type of debt is usually discharged in bankruptcy.

It’s Like Learning a New Language

Like any kind of legal proceeding, bankruptcy has a language all its own and it can seem like a foreign language to the uninitiated. But once you know the meaning of the most common bankruptcy terms, you’ll be close enough to fluent to better navigate the process.