Glossary of Bankruptcy Terms Bankruptcy Terms 341 Meeting First Meeting of Creditors Absolute Priority The order of payment to the different classes of creditors mandated by the Bankruptcy Code. In theory, claims with higher priority are paid in full before other claims receive anything. Junior creditors and shareholders are paid after senior creditors. Specifically, the usual order is: first, administrative claims; second, statutory priority claims such as tax claims, rent claims, consumer deposits, and unpaid wages and benefits from before the filing; third, secured creditor’s claims; fourth, unsecured creditor’s claims; and fifth, equity claims. Adequate Protection The right of a party with an interest in the debtor’s property (such as a secured creditor) to assurance that its interest will not be diminished during the bankruptcy proceedings. Administrative Claim (or Administrative Expense Claim) Debt incurred by the debtor, with court approval, after the bankruptcy filing, includes the necessary costs of preserving the estate, wages, salaries, court costs, lawyers’ fees, accountants’ fees, trustees’ expenses, etc. Adversary Proceeding A lawsuit filed in the bankruptcy court which is related to the debtor’s bankruptcy case. Examples are: complaints by a creditor to determine the dischargeability of a debt, and complaints to determine the extent and validity of liens. Arrears The amount that is unpaid and overdue as of the date the bankruptcy case is filed. The word “arrears” is often used when referring to back child support owed, back alimony owed, or the amount that is past due on mortgage payments (including interest and penalties). Asset Personal possessions of value, including cash, real estate, vehicles and investments. Automatic Stay The suspension of actions, such as debt collection or foreclosure, against the company or consumer in bankruptcy. Occurs automatically when the bankruptcy petition is filed. This action protects the debtor from creditors seeking to seize its assets. It also protects some creditors in that it prevents one creditor from obtaining an excessive share of the assets of the bankrupt to the exclusion of the other creditors. 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 Power The power of the court to invalidate certain obligations or transactions undertaken by a debtor prior to filing bankruptcy. It is generally intended to reverse transfers of property that favor one creditor over another. Bankrupt The entity that files a bankruptcy; the debtor; the insolvent entity. This is a non technical term and is not used in the Bankruptcy Code. Bankruptcy A non technical term for a legal state of insolvency. Bankruptcy Code The name given to the statutory body of bankruptcy laws after the Bankruptcy Reform Act of 1978. or 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. Bankruptcy Court The federal tribunal where cases under the Bankruptcy Code are litigated. Bankruptcy Estate Generally, the property of the debtor that is subject to the jurisdiction of the bankruptcy court. Bankruptcy Petition The document filed with the court to initiate a bankruptcy proceeding. Bar Date The last date that creditors may file a claim against the debtor. Chapter The Bankruptcy Code is organized into Chapters. Chapters 7, 9, 11, 12 and 13 concern, respectively: liquidation (business or non business); municipality bankruptcy; business reorganization; family farm debt adjustment; and wage earner or personal (i.e. non business) reorganization. Chapter 11 Reorganization proceedings, generally for business entities; the debtor maintains control of the business in Chapter 11 (unless the Court appoints a trustee). Chapter 7 Liquidation proceedings; generally assets are sold by a trustee and the company ceases operation. (Individuals may file Chapter 7 also). Chapter 13 Bankruptcy proceedings for an individual with the intention of rescheduling the individual’s debt (rather than liquidating the individual’s assets and debt; individual files under Chapter 7 to liquidate); Chapter 13 is referred to as wage earner bankruptcy, personal bankruptcy, or consumer bankruptcy; Chapter 13 cannot be used by a partnership or a corporation; it can be used by a sole proprietorship. Claims Rights to repayment made by creditors against a debtor; they may be liquidated, unliquidated, fixed, contingent, matured, unmatured, secured, unsecured, subordinated, legal, or equitable. See specific entries and priority of claims. Class Each of the different categories of claims against a debtor. Collateral The property which 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 final approval by the bankruptcy court of a debtor’s plan of reorganization. Confirmation takes place after the plan has been approved by creditors. Contested Matter A dispute among the parties to a bankruptcy proceeding, instituted by the filing of a motion of the court. Conversion Changing chapters in bankruptcy (e.g., converting from Chapter 11 to Chapter 7 or vice versa). Core Proceedings Those proceedings that are inherent in and fundamental to the administration of a bankruptcy case. Core proceedings are subject to the jurisdiction of the bankruptcy court. Non core proceedings may be conducted outside the jurisdiction of the bankruptcy court. Confirmation of a Chapter 13 Plan of reorganization over the objections of one or more classes of creditors. Creditor The person or organization to whom the debtor owes money or has some other form of legal obligation. Debtor The entity seeking protection from creditors under the bankruptcy laws. Debtor in Possession The debtor who remains in control of operations; as opposed to having a trustee operate the company. Default The failure by an entity to abide by the covenants in a debt obligation or other agreement to which it is a party. The most common default is non payment of interest or principal. Delinquency Failure to make payments when payments are due. For most mortgages, payments are due on the first day of the month. Even though they may not charge a “late fee” for a number of days, the payment is still considered to be late and the loan delinquent. When a loan payment is more than 30 days late, most lenders report the late payment to one or more of the credit bureaus. 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 continues for the benefit of creditors. Discharge (of indebtedness) The satisfaction or elimination of the debts of the debtor by the bankruptcy court. Dischargeable Debt Debt that can be eliminated in a bankruptcy. Certain debt is not dischargeable; that is, it may not be discharged through bankruptcy, or may only be discharged through Chapter 13. Family support and criminal restitution are examples of debt which cannot be discharged. Dismissal The termination of a bankruptcy proceeding. The bankruptcy court can dismiss a case if it deems that the debtor should not have filed, or that a plan can never be confirmed, or not complied with. See also conversion. Equity A homeowner’s financial interest in a property. Equity is the difference between the value of the property and the amount still owed on its mortgage and other liens. Executory Contract A contract in which some or all of the obligations of each party have not yet been completed. The debtor in possession (or trustee) is allowed to reject unilaterally certain executory contracts. 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 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 are 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. Fair Market Value The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. Foreclosure: The legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. 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 to the shareholders of the debtor. Filing Fees (as of January 2007) for Chapter 7 the fee is $299, for Chapter 11 it is $830 and for Chapter 13 it is $274. First Meeting of Creditors (341 meeting) A mandatory meeting between creditors and the debtor. It is usually held within a month of the filing of bankruptcy, but often occurs later when the debtor has filed its schedules of financial information. Fraudulent Conveyance The transfer of valuable assets from a company which: A) occurs when the company is technically insolvent, B) renders the company insolvent, or C) is made for less than adequate consideration. The spate of leveraged buyouts and other highly leveraged transactions in the 1980s has spurred a number of fraudulent conveyance allegations in recent years. Garnishment A court-ordered method of debt collection in which 25% of a person’s salary is paid to a creditor. The process by which a judgment creditor seizes money, which is owed to his judgment debtor, from a third party known as a garnishee. 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. Insolvency Another term used to describe a firm that is failing; generally it means that a firm’s liabilities exceed its assets or that it is unable to satisfy its obligations as they come due. Lien An interest in real or personal property which 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. Liquidation The dissolution of a company (or individual); usually operations cease and assets are sold by auction; Chapter 7 is usually employed for liquidations, business or personal. Matrix A mailing list of creditors of the debtor. No Asset Case A debt that cannot be eliminated in bankruptcy. Non dischargeable debts remain legally enforceable despite the bankruptcy discharge. Non Dischargeable A debt that cannot be eliminated in bankruptcy. Non dischargeable debts remain legally enforceable despite the bankruptcy discharge. 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 maybe 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, stock, furniture, etc. Petition (or Bankruptcy Petition or Petition for Relief) The document that commences a bankruptcy proceeding. Plan of Reorganization The document setting forth how a bankrupt company plans to satisfy its creditors. The plan of reorganization is the cornerstone of a successful Chapter 11 bankruptcy. 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. Post Petition Occurring after the filing of a petition. Preference A payment by a debtor made during a specified period (90 days or one year) prior to the filing that favors one creditor over others. Preference payments can usually be recovered and returned to the debtor’s estate. Pre Petition Occurring before the filing of a bankruptcy petition. Priority Claims Administrative expenses and salaries, wages, employee benefits, customer deposits and taxes which occurred pre-petition. Pro rata Proportionately. Proof of Claim Form filed by a creditor setting out its claims against a bankruptcy debtor. Receiver Particularly in foreign proceedings, or state court proceedings, a person appointed by the court to take custody of a debtor’s property. Reaffirm The debtor can choose 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 doesn’t pay. 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 the property, or limited, as for example, allowing the recordation of a notice of default. Reorganization The resolving of a Chapter 11 bankruptcy by the emergence of the debtor as a viable business. Generally, the company agrees with creditors on a plan for payment of their claims (the plan of reorganization) and emerges from Chapter 11 after the plan is confirmed by the court. Repossession Once in default, as defined by the creditor in the security agreement, occurs, the creditor can: repossess the collateral by self-help (depending on state law) or with the aid of a court order, dispose of the collateral by public or private foreclosure sale, retain the collateral in satisfaction of the debt, terminate the debtor’s right of redemption, add the costs of repossession and foreclosure to the unpaid balance of the debt, and pursue the debtor for any remaining unpaid balance or deficiency. Schedules The debtor must file the required lists of assets and liabilities to commence a bankruptcy case, collectively called the schedules. Secured Creditors One of two general types of creditors of a company. Secured creditors have a lien on property of the company. 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 bankruptcy. Skeleton Filing Term used at bankruptcy courts to describe a bankruptcy filing in which not all the necessary forms have been filed. Certain courts allow a case to commence if only certain important forms are filed so long as the balance of required forms are forthcoming within a certain period of time. Substantial Abuse A term that refers to the abusing of the privilege to file a petition. It usually describes fraud in cases of personal bankruptcy. Trustee An agent of the court who manages the property of the debtor for the benefit of the creditors. The court appoints a trustee in most Chapter 7 cases and in Chapter 11 cases when it determines that the debtor’s management should not remain in control. This type of trustee should be distinguished from the U.S. Trustee, who plays an administrative role in all bankruptcy cases. United States Trustee An agent of the U.S. Department of Justice appointed to assist in bankruptcy cases. The U.S. Trustee administers many of the duties of the court including appointing committees, appointing trustees and examiners, scrutinizing bankruptcy documents, etc. The United States Trustee Program was begun in 1979. Presently, it covers all federal judicial districts except for North Carolina and Alabama which are scheduled to be included in October of 2002. Unsecured Creditor One of two general types of creditors of a company. The unsecured creditors have no liens on the property of the company. Unsecured Debt A claim or debt is unsecured if there is no collateral that is security for the debt. Most consumer debts are unsecured. Voluntary Bankruptcy Bankruptcy filed by the debtor itself, data from the U.S. Administrative Office of the Courts subdivides bankruptcies into voluntary and involuntary. Wage Earner Bankruptcy Bankruptcy proceedings for an individual with the intention of rescheduling the individual’s debt (rather than liquidating the individual’s assets and debt; an individual file under Chapter 7 to liquidate); Chapter 13 is referred to as wage earner bankruptcy, personal bankruptcy, or consumer bankruptcy; Chapter 13 cannot be used by a partnership or a corporation; it can be used by a sole proprietorship. Workout An arrangement, outside of bankruptcy, by a debtor and its creditors for payment or rescheduling of payment of the debtor’s obligations. Usually applies to an informal agreement between a business and its creditors, although it can be a formal agreement and it can apply to consumer debtors. We are a Debt Relief Agency.