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Words and phrases frequently encountered in bankruptcy cases

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Sale: An exchange of value (one thing in exchange for another). For example, you pay the owner of a car $5000 for the car and in exchange the owner signs over the title and hands you the keys. The person filing bankruptcy must disclose Sales (and other transfers) during the two years prior to filing. Transfers to a trust within the 10 years prior to filing must also be disclosed. If you sell something for significantly less than it is worth, the sale may be classified a fraudulent conveyance and may be recoverable (taken back). A sale where the seller does not receive payment may be an incomplete sale and result in an account receivable (money owed) to the seller, which would be an asset the seller must disclose if filing bankruptcy.

Sanctions: Punishment. The court may impose sanctions on a party or attorney for failing to abide by court orders. Sanctions may be monetary (like a fine) or substantive (for example, if the court orders you to appear and produce proof of payments to a creditor who claims you have failed to pay, and you fail to appear and produce proof, the court may rule in favor of the creditor). Sanctions are intended to be a tool the judge can use to make parties comply with rules and orders of the court.

Schedules (official forms): The Federal Judicial Conference (United States Government) prescribes the format of documents that will be filed in bankruptcy cases. The Schedules are the forms where the debtor discloses all assets, debts, income and expenses. Schedules have to be filed within the 15 days following the day the Petition was filed unless you get an extension.

Secured debt: An obligation to pay money to a creditor who owns an interest in collateral that could be auctioned off if the borrower fails to pay (eg, mortgage, car loan). Bankruptcy may discharge (eliminate) the debt itself, but creditors’ rights in the collateral (security interests) are not eliminated without paying money to satisfy (fulfill) them. In Chapter 13, Secured debts are second in priority (to receive payment) after payment of Administrative Claims (attorney fees and Trustee compensation). In Chapter 7, Secured debts generally receive no payment from the Chapter 7 Trustee.

Senior lien holder: When there are several liens against the same property (eg, first mortgage, second mortgage, pool loan), the lender that was first in time (the earliest date) to record (file) its papers with the public records office has rights that are superior to others who file thereafter. For example, when there are two mortgages against the same real estate, if the property goes to foreclosure, all the money offered for the property at foreclosure has to first be paid to the first mortgage (senior lien holder) until it's paid in full before any money would go to the second mortgage. See Junior lien holder.

Serial filing (filer): Filing a series of separate bankruptcy cases. Bankruptcy cases generally result in dismissal (they get thrown out) or discharge (debtor receives forgiveness of debt). In order to receive a discharge, the person filing bankruptcy must comply with various rules and satisfy various requirements. When the debtor fails to satisfy requirements, the court will dismiss the case and the debtor loses court protection. If the debtor corrects the problems, the case may be reinstated. Instead of reinstating a dismissed case, the debtor may file a new case (restrictions apply). A new case filed following dismissal of a prior case is known as a serial filing and the debtor is known as a serial filer (or repeat filer). Bankruptcy court protection is limited in serial filings and serial filers may be prohibited from filing additional cases if the court determines that the serial cases were filed in Bad Faith.

Servicer (loan)(mortgage): An employee (agent) of a creditor (usually mortgage company) who collects the debt from the borrower and performs other services in its own name (for example, ABC Mortgage holds the mortgage against the property and it hires DEF Servicing to collect the payments and otherwise deal with the borrower). Most home mortgage financing involves servicing agents. The servicing agent’s rights to negotiate terms are limited. Mortgage loan servicers may generate more money on accounts that go into default than on those that pay on-time, since they charge for default collection services (late payment letters, collateral inspections, repossession, foreclosure).

Sheriff sale: Creditors may obtain a court order directing the county sheriff’s office to conduct a sale (public auction) of property in order to generate money to pay a debt. The most common examples are tax sales (for unpaid property tax) and HOA sales (for unpaid Home Owners Association assessments).

Short-sale: A sale where a secured creditor voluntarily releases its security interest (lien) against the collateral although it receives less than the full amount owed at time of sale. For example, if you owe the mortgage company $100000 and you have an offer from a buyer willing to pay $90000, the mortgage company may agree to release its lien against the property and let you sell it to the buyer for just $90000 (you the seller receive no money, the secured creditor receives the $90000). A short-sale may result in the mortgage company issuing a 1099C (like a W-2, a report of earnings) for the amount forgiven (the extra $10000), which may have income tax consequences.

Subordinate (subordination agreement) (equitable subordination): An act or agreement that degrades the property rights or contractual rights of a creditor. For example, a first mortgage lender may agree to subordinate its lien (reduce the priority of its interest) to the second mortgage lender’s lien in order to allow the second mortgage lender to advance more money to the owner as part of a refinance. Subordination is generally a voluntary transaction (the creditor enters into a subordination agreement and agrees to take a backseat to another creditor). Bankruptcy Court has the power to force a creditor to be subordinated to other creditors, particularly a creditor who is a bad actor (acting in bad faith, causing harm to the debtor’s bankruptcy estate) in procedure known as “equitable subordination”.

Substantially consummated: Mostly well-settled (established). In Chapter 11, once the plan of reorganization has been approved (confirmed), the debtor may ask the court to close the case if the plan has been substantially consummated (significant payments to creditors under the plan have begun, all required reports have been filed). Until the case is closed, the debtor in Chapter 11 must file reports with the court and the United States Trustee charges quarterly monitoring fees. After the case is closed, there is no reporting requirement and no more fees come due to the United States Trustee. Individuals who close their case before all payments due under the plan have been paid must reopen the case at the end of payments and ask the court for a discharge.

Summons: A notice issued by a court directing a defendant (the person being sued) to respond to a law suit within time limits and advising that failure to respond may result in judgment (a decision) against the defendant. Failure to deliver the summons and give the defendant proper Notice of the court proceeding may be grounds to reverse orders of the court in the future. In state courts, in most instances the summons must be delivered in-hand (at the defendant’s home or place of employment) and the process server (person delivering the summons to the defendant) must file a sworn statement confirming delivery. In bankruptcy court, most summons may be delivered by the US Postal Service in regular mail.

Surrender: To turn over possession and give up ownership rights. In bankruptcy, the person filing bankruptcy may choose to surrender collateral to the secured creditor (eg, turn the car in to the auto lender) and owe nothing after the discharge in bankruptcy. In Chapter 7, the debtor is supposed to surrender collateral not being retained within 45 days after the Meeting of Creditors.

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T

Tax lien: A lien imposed by a taxing authority, without court order. The most common examples of tax liens are county property tax liens (that come into existence automatically according to state law) and income tax liens.

Tax return: A report of income required of every U.S. resident who has income sufficient to require a report. Some residents are not required to file tax returns. If the person filing bankruptcy fails to file required tax returns for any of the four years prior to filing the bankruptcy case, the bankruptcy court may dismiss (throw out) the bankruptcy case.

Tax sale: Taxing authorities may sell property at public auction in order to pay taxes owed by the owner.

Title: A document or record that is evidence of ownership. A title or deed to property may identify the current owner of record. Title is only evidence of ownership and does not, by itself, determine the true, beneficial ownership of the property.

Transfer: The passing of an interest or right from one person to another. In bankruptcy, a transfer includes voluntary (specifically authorized by the owner) and involuntary dispossessions (alienation of ownership without the approval of the owner – like garnishment). Some transfers are recoverable (may be taken back) in bankruptcy. After a bankruptcy case is filed, transfers of the debtor’s property while the bankruptcy case is pending require court approval.

Trustee: In bankruptcy, an official appointed by bankruptcy court to oversee administration (distribution) of the property belonging to the person filing bankruptcy (debtor). The debtor in bankruptcy must cooperate with the Trustee appointed by the court and provide information and turn over assets as required under Bankruptcy law. The Trustee is compensated with a commission on money distributed to creditors. The Trustee may recover (take back) gifts, payments, sales and transfers made prior to filing the bankruptcy case. The Trustee is temporarily the owner of the debtor’s property and prohibits transfers without court approval.

Trustee sale (notice of): In most mortgage financing, the mortgage lender may appoint a Trustee to sell the real estate if the borrower fails to pay payments due under the mortgage loan. Not the same as the trustee in bankruptcy.

Turnover (turn over): The act of relinquishing possession of property under force of law or court order. In bankruptcy, the debtor may be required to turn over property to the Trustee appointed by the court to represent the interest of creditors. A secured creditor who has taken possession of collateral (eg, repossessed the car) may be required to turn over property to the debtor if the property is necessary for a successful reorganization.

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U

Undue hardship: A circumstance imposing burdens on the debtor that are unnecessarily harsh and oppressive, in light of community standards for maintaining a meaningful human existence, that justifies special, juridical dispensation on equitable principles. In bankruptcy, a student loan borrower may ask bankruptcy court to discharge a student loan obligation, otherwise non-dischargeable, if denying the debtor a discharge would constitute an undue hardship. The term is not defined in the Bankruptcy Code, but the prevailing standard for finding undue hardship requires a showing that (1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

United States Trustee: An office of the federal government, the United States Trustee Program is administered by the United States Department of Justice and is responsible for overseeing the bankruptcy process, primarily on behalf of creditors. Acting in the form of a policing agency, the United States Trustee is sometimes referred to as “the Bankruptcy Police”. The office ensures that debtors, creditors and attorneys operating in the bankruptcy system observe requirements of the Bankruptcy Code and applicable state law and may pursue civil and criminal prosecutions of bankruptcy crimes and offenses.

Unsecured debt (non-priority): Debt for which there is no collateral (most credit cards, medical debts, student loans, some taxes) having the lowest priority classification. Unsecured non-priority debt is the last class to receive distribution in bankruptcy. All dischargeable, unsecured non-priority debt is eliminated upon entry of the order of discharge. Student loans and certain taxes are unsecured non-priority debts but are not eliminated upon entry of discharge.

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