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Bankruptcy Glossary of Terms

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Filing for bankruptcy can be an effective way to get a fresh financial start, but it can also be overwhelming and confusing. This glossary of terms commonly used during bankruptcy cases can provide you with a basic understanding of certain common terminology associated with bankruptcy cases. For a better understand of bankruptcy law, you can discuss your case with a local bankruptcy lawyer.


Adjustable Rate Mortgage (ARM): Mortgage loan with an interest rate that may change. The changing interest rate means a change in payments. Compare to a fixed rate mortgage, which has uniform payment amounts throughout the loan's duration.

During the housing market's recent boom cycle, ARMs were often pushed to borrowers who didn't completely understand and/or couldn't afford them. Borrowers would pay a reduced payment at first, with the presumption that once the ARM adjusted, their income would have gone up. Many have since defaulted, which contributed to the foreclosure crisis.

Asset: Anything of value owned by a person or entity.

Bankruptcy trustees can liquidate non-exempt assets to pay creditors in Chapter 7 cases.

Automatic Stay: A protection granted to those who file for bankruptcy. The automatic stay halts most collection actions, including lawsuits, debt collection, garnishment, repossession and foreclosure.

Usually, an automatic stay takes effect immediately after a bankruptcy case is filed.

Bankruptcy: In legal terms, a person's (or company's) declaration of an inability to pay debts. U.S. bankruptcy law provides two options for managing debts through bankruptcy: Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Bankruptcy Petition: The paperwork that, when completed, marks the official beginning of a bankruptcy case, also called "schedules".

Once the bankruptcy petition is filed, those who choose to pursue financial renewal through Chapter 7 bankruptcy can expect a different chain of events from those who choose Chapter 13 bankruptcy.

Bankruptcy Trustee: The person responsible for overseeing the proceedings of a bankruptcy case.

In Chapter 13 bankruptcy cases, the trustee allocates the filer's monthly payments to creditors and makes sure everyone follows bankruptcy law. In Chapter 7 bankruptcy cases, the trustee is responsible for collecting, liquidating and distributing to creditors any non-exempt property.

BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act): Bankruptcy law passed in 2005. BAPCPA introduced Credit Counseling and Debtor Education requirements and the Chapter 7 means test. Learn more.

Chapter 7 Bankruptcy: Eliminates many unsecured debts entirely. Chapter 7 bankruptcy is sometimes called "liquidation" because the trustee can convert any non-exempt assets to cash (liquidate them) in order to satisfy debts.

Those who file for Chapter 7 bankruptcy must qualify with a means test. If you don't qualify, protection may still be available through Chapter 13 bankruptcy.

Chapter 13 Bankruptcy: Sometimes called "reorganization" because petitioners get a chance to repay debts over a three-to-five-year period.

Those who file Chapter 13 bankruptcy can often keep their homes and cars while getting up to date on debts.

Collateral: Property used as security for a loan.

In a car loan, the car is collateral for the loan: if the borrower doesn't adhere to the loan's terms, he loses his car to the lender. The borrower's incentive to keep up with payments is having a car to drive.

Debts with collateral are often called secured debts, because the debt is tied to a physical object. Compare with unsecured debts.

Cosigner: Someone who signs loan papers as a backup for another person. If the primary borrower can't make payments, the cosigner is legally responsible for doing so. Cosigners are treated differently in Chapter 7 and Chapter 13 bankruptcy.

For those rebuilding after bankruptcy, enlisting a cosigner with a strong credit history is one way to get better terms on a loan.

Credit Counseling Briefing: The "ticket in" to bankruptcy. The Credit Counseling Briefing must be completed before filing a bankruptcy petition with the court. Credit Counseling Briefings can be completed in person, over the phone or on the Internet, and can be purchased here. The Credit Counseling certificate must be filed with the bankruptcy petition.

Bankruptcy judges have been known to dismiss bankruptcy cases filed because the petitioner hasn't completed a Credit Counseling Briefing.

Credit Report: Documentation of your history as a credit user, including payment history, current account status and more. All Americans are entitled to one free credit report per year from each of the big three credit reporting agencies (Equifax, Experian and TransUnion).

Checking your report regularly helps prevent identity theft and allows you to ensure accuracy. To get a free copy of your credit report, visit

Credit Reporting Agency (Credit Bureau): A company that gathers, records and reports consumer credit information.

Free reports from TransUnion, Equifax and Experian are available at the above website or from the credit reporting agencies directly. Many other sites offer credit reports, but charge fees or require you to purchase services or tools you don't need. Many of these sites promise free use, but end up charging a monthly fee unless you cancel a subscription to the site.

Credit Score: A number (300-850) that signifies an individual's credit risk — the higher the number, the lower the risk.

The Fair Isaac Corporation has developed a formula for calculating this score ("FICO score"), which lenders use to decide how much to lend to borrowers. Each credit bureau also has its own credit scoring system, so credit scores may vary depending upon the agency a creditor uses.

Those with high credit scores can borrow at "prime" rates. Those with lower scores can generally expect to pay higher "subprime" rates.

Creditor: Someone who is owed money.

Creditors must receive notice of a bankruptcy filing and have the opportunity to file proofs of claim, appear at a meeting to determine whether or not a Chapter 7 debtor has any assets available to pay those claims, and weigh in on a Chapter 13 plan.

Debtor: Someone who owes money.

Filing personal bankruptcy helps some individuals eliminate debtor status through repayment or discharge.

Debtor Education: Since BAPCPA took effect in 2005, every bankruptcy filer has had to complete this course before receiving a discharge from the court.

The Debtor Education course prepares bankruptcy petitioners for post-bankruptcy life by teaching debt management and money handling skills to maximize the benefit of bankruptcy's fresh start.

Default: The state of being behind on payments and/or the failure to pay what is owed.

Lenders can begin collection action (including repossession, foreclosure and garnishment) when a loan defaults. Exactly how far behind you must be to be considered "in default" depends on the terms of the individual loan.

Discharge: 1. End of bankruptcy. When all of the court's requirements have been fulfilled, the debtor receives a bankruptcy discharge. 2. The forgiveness of debt. Chapter 7 bankruptcy allows for the discharge of some unsecured debts.

Dischargeable: Legally forgivable in bankruptcy, used with debts.

In Chapter 7 bankruptcy, most credit card debt, personal loans and medical bills are dischargeable. Child support obligations, student loans and most tax debts generally are not dischargeable.

Equity: The difference between the value of an asset and what is owed on it (liens, mortgages, etc.).

Put simply, if you can sell something for more than what it would cost to pay off what you owe on it, you have equity. For example, if your home is worth $200,000 and you owe $150,000 on it, then you have $50,000 in equity. Equity can be gained by making payments on a loan or by improving the value of the asset.

Exemptions: Assets that are protected during Chapter 7 bankruptcy and cannot be liquidated to pay creditors.

Exemptions are unique to each state, but most include such things as a certain amount of value in a home and car, work tools, and certain personal items.

FICO Score: Your credit score, based on the Fair Isaac Cooperation's formula. The FICO score is the one most widely used by lenders to determine a borrower's risk level.

Scores range from 300-850; scores close to 850 qualify borrowers for attractive loan terms, while scores closer to 300 qualify borrowers for less credit at less attractive terms.

Fixed Rate Mortgage: A "traditional" home loan at a set interest rate that borrowers repay in equal monthly payments over the loan's life (usually 15-30 years). See adjustable rate mortgage for contrast.

Foreclosure (Mortgage Foreclosure): The process of repossessing a house by a bank or lender, following a homeowner's failure to follow the terms of the mortgage agreement. Usually, foreclosures result from borrowers' inability to make mortgage payments.

The resetting of many adjustable rate mortgages has left many Americans unable to make payments and has been a major factor in the foreclosure crisis and credit crunch.

Garnishment: When money you make is court-ordered to pay a creditor.

If your wages are garnished, the portion allowed by law will go directly to your creditors from your employer. Bankruptcy's automatic stay stops most garnishment.

Identity Theft: The crime of posing as another person by using her identification information (bank account number, Social Security Number, credit card numbers, etc.). Identity thieves can run up debt, drain current accounts, open new accounts and much more.

One way to minimize your risk of being victimized by identity theft is to check your credit report regularly and report suspicious activity.

Insolvency: See bankruptcy.

Lien: A claim on property in exchange for a debt.

Voluntary liens (like mortgage and auto loans) involve an agreement between lender and borrower: if the borrower doesn't make appropriate payments, the lender gets the property back. Involuntary liens are generally entered as the result of a judgment in a law suit.

Liquidation: The conversion to cash of an asset.

A Chapter 7 bankruptcy trustee can liquidate a petitioner's non-exempt assets to pay creditors. Usually, though, liquidation doesn't actually occur because most filers don't have any non-exempt assets.

Mass Layoffs: The letting go of a large number of employees simultaneously, usually because of reorganization or financial strains.

Regularly updated statistics on mass layoffs are available from the Bureau of Labor Statistics.

Means Test: A test used to determine eligibility for filing under Chapter 7 of the U.S. Bankruptcy Code.

The means test compares the debtor's income to the applicable median income, then (if the debtor's income exceeds the median) considers disposable income to determine whether or not the debtor can make payments toward his debts in Chapter 13 bankruptcy.

Medical Bankruptcy: Bankruptcy as a result of excessive medical expenses.

Studies have shown that medical debt contributes to as many as half of all bankruptcy filings in the United States, making it the second most common causal factor.

Mortgage: A loan (pledge to pay) backed by real estate.

Those with mortgages agree to forfeit their houses or other real property (foreclosure) if they don't comply with the terms of the loan (pledge).

Non-Dischargeable: Debt that is not excusable in the eyes of the law.

In Chapter 7 bankruptcy, most tax debt, child support and student loans are non-dischargeable and must eventually be paid.

Payday Loan: Small, short-term, high-interest loans advertised as a bridge between paychecks. Because of their unfavorable terms, they can lead to a devastating debt cycle.

Annual interest rates on payday loans can reach 390%, which has led several states to pass restrictive laws. Most experts advise to avoid payday loans if at all possible.

Predatory Lending: Deceptive tactics used by lenders to convince borrowers to agree to expensive and unfavorable loan terms. No legal definition exists, but examples include lying about a loan's terms to convince a borrower to sign papers and aiming expensive loans at specific groups of people.

Abusive overdraft loans, payday loans, some credit cards and some subprime mortgages have been cited as examples of predatory loans.

Repossession: The recovery of property by a creditor or lender when a borrower fails to make necessary payments.

Defaulting on a car loan could lead to your lender repossessing your car. Bankruptcy's automatic stay will halt most repossession.

Schedules: Documents filed with the bankruptcy court outlining information on your debts, assets and income.

After filing your bankruptcy petition, your lawyer will file schedules and other necessary paperwork.

Secured Debt: Any debt backed by material goods (collateral).

Mortgages are secured by homes. Debt securitization reduces risk for lenders, who can repossess collateral if a borrower defaults on a loan.

Subprime Loan: A loan offered to those with shaky credit history or a low credit score. Subprime loans are more expensive for borrowers because they are riskier for lenders.

Questionable and predatory practices in the subprime lending industry have been cited as a major cause of the housing boom/bust and subsequent recession.

Unsecured Debt: A debt not backed by material goods (collateral).

Most credit card debt is not directly backed by any property, and so is unsecured. Generally, medical bills, utility bills and payday loans are also unsecured debt.

United States Bankruptcy Code: The law that outlines how bankruptcy courts operate in the United States.

To view the full U.S. Bankruptcy Code, follow this link.

To learn more about bankruptcy and how filing may be able to help your situation, connect with a local bankruptcy lawyer. Simply fill out our free bankruptcy case evaluation form or call 877-833-2410 today.

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