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Bankruptcy Terms and Definitions

October 10, 2014

Bankruptcy is complex, but complexity lies more within the many terms and overlapping rules that one must sort through, rather than the difficulty of the subject itself. Here is a boiled-down, simplified summary of the most common and important Bankruptcy Terms:

Bankruptcy Terms and Definitions

Automatic Stay:

An automatic stay stops collection actions by creditors, with certain exceptions, to collect debts from a debtor who has filed bankruptcy. The stay begins at the moment the bankruptcy petition is filed. Secured creditors may, however, petition the bankruptcy court for relief from the automatic stay showing cause.

The automatic stay provides the debtor against certain actions from the creditor, including:

  • beginning or continuing legal proceeding against the debtor
  • stops actions to take debtor’s property
  • stops the actions of enforcement, or creating a lien against a debtor’s property
  • A demand made by the creditor to set-off the debt proceeding the filing of the case

A court can grant relief from the automatic stay if the creditor can show that the stay does not vie the creditor “adequate protection” or if it jeopardizes the creditor’s interest in the property.

Revised laws added two more exceptions to the automatic stay. Any eviction proceedings in which the landlord has obtained a judgment of possession before filing the petition may be continued, and any eviction proceedings filed after the filing of bankruptcy are exempt if the proceeding involves evicting the tenant of using illegal substances or “endangerment” of the property.

New provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act, certain restrictions were added if a debtor had a case dismissed in a case pending during the year before the bankruptcy case was filed, the automatic stay will expire (to a certain extent) unless the debtor obtains an order extending the stay within one month. If the debtor had two cases pending in the year prior to filing, the automatic stay does not go into effect unless the debtor files a motion with the court and is granted such action.

Bankruptcy Petition:

A bankruptcy petition is the official form that is filed with the Federal Bankruptcy Court to start the bankruptcy proceedings.

Creditor:

Any person, entity, or institution that is owed money is called a creditor, such as, a bank, lending institution, finance company, family member, friend or an acquaintance.

Collateral:

Is a form of security to ensure the lender gets paid.

Debtor:

Any person or enterprise that owes money to another party is called a debtor.

Discharge:

A discharge is the courts order relieving the debtor from financial liability for specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are deemed as discharged. This order by the court forever bars creditors from taking any action to collect. This includes any communications from a creditor either by phone, letters and personal contact, attaching liens to property or in any way to pursue to collect on a discharged debt.

Even though a debtor is not held responsible for debts that were discharged in the bankruptcy, a valid lien (such as a lien against a car that the debtor surrendered through the bankruptcy process) may remain in effect so the creditor may enforce the lien to recover the property.

Meeting of Creditors:

The meeting of creditor’s is a hearing that is held for the trustee to verify the debtor, get any testimony under oath and allows the trustee to question the debtor of the validity of what was stated in the bankruptcy petition. The debtor must provide proof of a Social Security Number and a picture ID at the hearing. The meeting of creditors, also known as a 341, hearing is held not in a court but in a room that is open to the public. While others may be in the room while the hearing takes place, most if not all are there for the same reason.

Creditors are allowed to come as well but most, if not all, do not show. They are not required to be there but however have the right to appear.

Aside from other debtors in the room waiting for their case to be called, the only other parties that are typically in the room are you, your Attorney, the Trustee and their assistant.

Reaffirmation or to reaffirm:

A Reaffirmation agreement is an agreement to keep the debt and to continue to pay the debt. In bankruptcy you may be asked to reaffirm a debt. The creditor will provide a reaffirmation agreement stating the original terms of the agreement when you purchased the item and any repayment plan. Some creditors demand a reaffirmation agreement be executed or the debtor may not be eligible to keep the item. This holds true mostly on car loans or car leases.

There are pros and cons to reaffirming a debt. Speak with your Attorney to guide you through the process.

Secured Creditors:

A person or entity to which money is owed and the lender used property to secure the debt.  For example, when you have a mortgage the house secures the debt until the debt has been paid in full. A car loan is secured by the car itself. Other types of loans such as personal loans may be secured by other types of property.

There are certain credit cards that can be secured as well. Generally big ticketed items such as TV’s, furniture, and appliances put on department store credit can be secured debt as well. Here is an example: If you purchased jewelry and put the payment on that stores credit card the jewelry purchase would be used as collateral till the jewelry has been paid off.

Trustee:

A trustee in bankruptcy is the person who conducts the Meeting of Creditors and is in charge of administering a bankruptcy estate.

Unsecured Debt:

Unsecured debt is debt that you promise to pay back on your word alone. The creditor has no specific property securing the loan. Most common unsecured debt is personal loans and credit cards.

Failing to pay unsecured debt can lead to the creditor bringing a lawsuit against you. If they win they may proceed to obtain a judgment and collect through a wage garnishment, tax refunds, bank accounts and/or seize a lien property to satisfy the debt. As a result, unsecured debt is riskier for lenders and a higher interest rate is usually charged.

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