/* */

Bankrupty Terms for the Layperson

Many people have trouble understanding the terms that lawyers routinely use.  But even attorneys in other areas of practice often complain that bankruptcy attorneys seem to have their own arcane language.  Because both debtors and their attorneys receive motions, pleadings and orders during the term of their cases, this may help to explain those terms.  Standard non-bankruptcy terms, such as “foreclosure”, “lien” and “garnishment” are not included in this list.  Hopefully this will assist the reader in understanding some of the terms commonly used during their bankruptcy case, so as to allow meaningful communication with their attorney and staff:

AUTOMATIC STAY – The filing of a bankruptcy petition “automatically” stops or “stays” any debt collection activity pending against the debtor.  This would include letters, phone calls, lawsuits, garnishments, repossessions, foreclosures or any other activity designed to collect money from a debtor.  It is “automatic” because creditors in a consumer case do not have the right to be heard and prevent the filing of the case and the “stay” of their collection activity.  This is temporary relief which becomes final, after the debtor has either liquidated assets or re-organized.

DISCHARGE – Ultimately a “discharge” is the goal of any consumer bankruptcy filing, meaning that the case has been successfully concluded.  Unlike the “automatic stay” which is temporary, “discharge” is permanent and means that affected creditors are forever prohibited from collecting any money from the debtor.  However, some debts – such as child support, certain taxes and student loans – are protected from discharge, meaning that the debtor would still be legally responsible to pay those debts once the case is concluded.

DEBTOR – Anyone who files a bankruptcy petition, whether individually, or jointly as a married couple.

CREDITOR – Anyone who may have a claim for money or property against the Debtor.  There is no requirement that the debt has to be in writing, or otherwise commemorated.  In addition, a party can be a “creditor” even though the exact amount of the debt has yet to be determined.

PETITION – This is the document that is filed with the Bankruptcy Court to initiate the bankruptcy, and obtain the benefits and protection of the “automatic stay”.  It is usually assembled with the assistance of an attorney, and includes, among other things, information about the debtor’s assets (property), liabilities (debts), income, expenses, financial affairs and intentions with respect to property that they wish to retain.  Failure to provide all necessary information in the bankruptcy “petition”, or to testify truthfully about its contents, could lead to a denial of “discharge”.  This means that while the debtor will be protected by the “automatic” stay, he or she will lose the permanent protection afforded by the “discharge”, and will be subject to creditor collection attempts upon the end of their case.

SCHEDULES – These are specific portions of the bankruptcy petition, much like chapters in a book.  Each “schedule” describes a different part of the debtor’s financial situation.  Accuracy in the schedules will result in complete and through petition.

STATEMENT OF FINANCIAL AFFAIRS – Another portion of the “petition” in which the debtor identifies the sale or transfer of property, payments to creditors, pending legal proceedings, and information about the operation of a business, if applicable.  Like the “schedules”, accuracy is a must in preparing the “statement of financial affairs”.

STATEMENT OF INTENTIONS – In this portion of the bankruptcy petition, the debtor indicates their intentions with respect to secured debts only.  For instance, if a debtor wished to retain a house or car which was collateral for a loan, it would be indicated on the statement of intentions.  The three available options on the statement of intentions are to “reaffirm”, “surrender” or “redeem”.

SECURED DEBT – This is a debt which has collateral or “security” that the creditor can repossess in the event of nonpayment.  A mortgage on a house or car loan would be a “secured debt”.

UNSECURED DEBT – This is a debt that does not have collateral, such as a credit card, medical bill or personal loan.

REAFFIRM – This is the term used when a debtor agrees to retain the collateral on a secured debt.  By “reaffirming” the debt, the debtor allows it to survive the discharge.  Unlike discharged debts, a creditor on a debt that has been reaffirmed is allowed to collect money, and hold the debtor liable for any default on the debt.  As a result, it is very important to make sure that your budget will allow you to afford the payments on a secured debt in the future, after the case has been discharged.

SURRENDER – Another option with respect to a “secured debt” is to “surrender” the collateral.  While the creditor is allowed to repossess or foreclose on their collateral, any remaining portion of the debt will be discharged.

REDEEM – This allows the debtor to retain collateral on a secured debt without reaffirming.  Instead the debtor agrees to “redeem” the collateral.  Instead of ”reaffirming” on the debt and resuming the regular monthly payments, the debtor pays a lump-sum to the creditor to “redeem” the collateral.  In exchange, the creditor will release its lien on the collateral.  The debtor can save money in this manner as he or she is allowed to pay the fair market value of the collateral, which may be significantly less than the amount owed.  Since it requires a lump-sum payment to “redeem” collateral, it is most commonly used on furniture and older cars which have a low value.

TRUSTEE – This is the individual appointed by the court to supervise the debtor’s case.  Chapter 7 and Chapter 13 Trustees share similar responsibilities, in that they both will review the petition that is filed by the debtor, and question the debtor about the contents.  They are also both responsible for distributing money to creditors.  In a Chapter 13 case, the Trustee collects money from the debtor and distributes it to the creditors over a 3-5 year period.  In a Chapter 7 case, money is only distributed to creditors if the Trustee is able to recover money from the debtor’s non-exempt assets.

EXEMPTIONS – These are state and federal laws which designate what property that a debtor can “exempt”, or protect, from creditors.  Part of preparing the bankruptcy petition involves identifying all of the debtor’s assets, and determining what “exemptions” are available to protect them.  If property is “exempt”, then it cannot be liquidated for the benefit of creditors.  Applying exemptions to protect the debtor’s assets is the main goal of the bankruptcy attorney.

MEETING OF CREDITORS – Also referred to as the “341 Meeting” (referring to section 341 of the Bankruptcy Code), the “meeting of creditors” is where the debtor appears in front of the Trustee to testify under oath about the petition and other documents filed with the bankruptcy court.  Your attorney will appear with you, and your creditors are invited to attend.  The amount of time that the debtor will have to testify will vary, depending upon the simplicity or complexity of the case, or the accuracy of the petition.

DOMESTIC SUPPORT OBLIGATION QUESTIONNAIRE – If the debtor is required to pay any type of “domestic support obligation”, such as alimony or child support, then they must submit a “domestic support obligation questionnaire” (or “DSO”) to the Trustee at the meeting of creditors.  This identifies the recipient of any domestic support payments made by the debtor.

MOTION – Any time that a party requests something from the Court, they are required to file a motion.

OBJECTION – An “objection” is usually a response to a motion when an opposing party does not agree to the action requested in the “motion”.

ORDER – After a motion is filed, the Judge will rule on the motion, after considering the merits of the motion, and the law and facts in support of the motion.  If an objection is filed, the Judge will also consider the merits of the objection.  The Judge will then issue a ruling, known as an “order” which resolves the motion, and if applicable the objection.  The order will compel a party to do or not do some specific action, or require some other action.

DISMISSAL – An order of “dismissing” a case may be entered in response to a “motion to dismiss”.  A “dismissal” means that the debtor has failed to perform certain requirements in order to qualify for bankruptcy protection.  A “dismissal” could also be granted when the debtor is not eligible for bankruptcy relief, or has committed some act of fraud or omission (such as making false or incomplete statements in the petition).  A dismissal may also be voluntary, in an instance in which the debtor no longer wishes to remain in their case. Once a case is dismissed, the debtor no longer has the protection of the “automatic stay”, and creditors are allowed to resume collection of their debts.