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Common Bankruptcy Definitions

Below you’ll find a detailed list of some of the most common bankruptcy definitions. The definitions in this list are briefly addressed in our glossary of bankruptcy terms but the most common ones are expanded upon more here.

Chapter 7: Chapter 7 is the simplest form of bankruptcy. All debtors who wish to file Chapter 7 must first pass a local means test which tests the debtor’s ability to pay. Chapter 7 is used mainly by debtors who don’t have homes or expensive cars that they want to save. Its main purpose is to eliminate unsecured debts such as credit card bills and medical bills. A Chapter 7 will discharge all unsecured debts. It normally takes about 6 months from start to finish. Debtors will file a petition and bankruptcy schedules. They’ll also need to confirm that they took a credit counseling course that is approved by the bankruptcy court.

Chapter 13: Chapter 13 is for debtors who have some ability to pay off their debts. Debtors who fail the Chapter 7 means test must file Chapter 7. Many debtors who use Chapter 13 have a home, an expensive vehicle or valuable assets that they are trying to save. The basic keys are that the debtor agrees to pay any arrears on secured debts over a three to five year period, agrees to continue monthly payments on mortgages and other secured loans and agrees to pay a percentage of the unsecured debts over the same three to five year period. Debtors will file a petition, bankruptcy schedules and a bankruptcy plan. Debtors must show that they took an approved credit counseling course.

Automatic Stay: When debtors file a bankruptcy petition, the automatic stay means that all credit actions against the debtor must stop immediately. This includes harassing calls from creditors and collection agencies. It also includes foreclosure actions and other legal actions against the debtor. Creditors who believe they have a justifiable reason to be discharged from the bankruptcy need to get relief from the automatic stay. The automatic stay gives the debtor a chance to breathe and to work with a bankruptcy lawyer to fully figure out his/her financial situation and how to handle the debt obligations.

Secured Debt: Any debt that is covered by collateral is considered a secured debt. Debtors normally create a secured debt when they take out a loan on their home, their car or other valuable items. The creditor, to make sure it gets paid, agrees to give the loan on the condition that the debtor agrees that he/she will turn over or lose his/her rights in the item the debtor purchases. Homeowners who can’t afford to pay full cash for the home, which means most homeowners, give the loan company a mortgage on the home. If the debtor doesn’t keep up the payments, then the debtor might lose their home to a foreclosure action. Debtors with secured debt normally have to make arrangements to pay the arrears and continue the monthly payments when they file bankruptcy.

Unsecured Debt: Debt that is not secured by collateral is called unsecured debt. Most retail purchases are either paid for in cash or by credit card. The debtor agrees to pay the credit card company the amount due. Credit card debts that aren’t paid promptly can be paid over time – but usually with a large interest requirement. Debtors who see doctors or hospitals agree to pay their health care provider. Whatever insurance doesn’t pay – then the debtor has to pay the balance.

Petition in Bankruptcy: Whether a debtor files a Chapter 7 or Chapter 13, the debtor has to file an initial document called the petition in bankruptcy. The filing of the petition immediately creates an automatic stay. The debtor normally has to pay court costs before filing the petition. The petition is typically a quick summary of the debtor’s financial status and an indication of what type of bankruptcy is being filed.

Bankruptcy Plan: Chapter 13 filers must file a bankruptcy plan that explains how they will pay some or all of their debts. The plan must pay all of the secured debts by paying the arrears over a three to five year period and the future monthly payments on time. A percentage of the unsecured debts must also be paid over time.

Bankruptcy Schedules: Chapter 7 and Chapter 13 debtors have to file numerous bankruptcy schedules. The key schedules are the ones that list all the debtor’s assets, all the debtor’s debt obligations (secured and unsecured), the debtor’s income and the debtor’s expenses.

Means Testing: To make sure debtors who have a fair amount of income could pay their debts, the new bankruptcy law of 2005 requires that all debtors pass a means test. The test examines the debtor’s income and then compares it to similar sized households in the debtor’s locations. If the debtor falls below the median for the household size and area, then the debtor can file a Chapter 7. Debtors who fail the initial means test may pass other more complicated tests that an experienced bankruptcy lawyer will know. Debtors who fail all the means tests must file a Chapter 13.

Credit Counseling: A pre-bankruptcy requirement that the debtor take an approved course (in person, online or by phone) that tries to explain general financial information about debts and credit. All debtors must take this course before filing for bankruptcy.

Reaffirmation Agreement: Debtors in a Chapter 7 bankruptcy may want to try to save some of their assets. A common example is an automobile. Even though the debtor could discharge the car loan but lose the car, many debtors will want to try to keep the car. Debtors in this situation can agree to continue the car payments. The car loan company will have to agree to the payments and the agreement has to be approved by the Bankruptcy Court to make sure the debtor isn’t getting in over his/her head. Almost any agreement can be reaffirmed. The question is – is it good for the debtor to do so?

Creditor’s Meeting: A meeting where the Trustee and the creditors have the right to ask the debtor questions about his/her financial situation. In most cases, only the Trustee appears and the questions are usually pretty straightforward.

Bankruptcy Trustee: The court appointed representative who works on behalf of the creditors and the Court to process the debtor’s bankruptcy through to completion.