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Words and phrases frequently encountered in bankruptcy cases

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P

Perfection of lien: In order to obtain a valid security interest (lien) against collateral, creditors must follow specific steps according to law. For example, in order for an auto lender to obtain a valid interest in a vehicle that is collateral for a car loan, the lender’s name must be recorded (printed) on the actual title to the vehicle. Completing all the steps is known as perfecting the lien. Depending on the type of property, the rules for perfecting a lien vary. When a creditor has failed to timely perfect its lien before the debtor files bankruptcy, the lien may be avoided (rendered void).

Perjury: Making a knowingly false or incomplete statement while under oath. Perjury is a serious crime and, in bankruptcy, a felony punishable by five years in prison and a $250,000 fine.

Personal financial management course (pre-discharge): After filing a bankruptcy case, before an individual debtor can receive a discharge, the debtor must complete the personal financial management course and file the certificate of completion with the court (both debtors must complete the course and file the certificate in joint case filed by married persons). The Office of the United States Trustee determines who is qualified and approved to offer the course and maintains a list of approved providers. The cost of the course varies among providers (between $11-$50). The course is available by internet, by phone and in person and usually takes about 90 minutes. The providers do not issue grades, there are no wrong answers, you cannot fail the course, you merely have to finish. Rules require the debtor to file the certificate of completion within 45 days of the meeting of creditors. Failure to file the certificate will result in the case being closed without issuance of a discharge of debt.

Plan of reorganization: In reorganization cases (Chapter 11, Chapter 12 and Chapter 13), the person filing proposes a plan of reorganization addressing creditors and their collateral, the duration of the plan and how much debtor will distribute to creditors over the course of the plan. Chapter 13 has a limited plan duration of 60 months maximum. There are several tests to determine if a plan can be approved (confirmed). If a plan fails any of the tests, the debtor may file an amended plan to correct deficiencies and overcome objections to the plan. The plan must be proposed in good faith and must be in the best interests of creditors, among other requirements.

Post-petition: The first document filed in a bankruptcy case is the Petition. The date the petition is filed is known as the date of filing or date of commencement. Events that occur after the date of filing are referred to as Post-petition (for example, debts incurred after the date of filing are known as post-petition debts).

Pre-existing duty rule: If you owe a debt, fair and square, and you haggle with the creditor until they let you pay something less than the full amount you owe, you still owe the balance, since the creditor is really only getting something they're already entitled to (your payment). A creditor might forgive the balance and send you a 1099C, which could cause you to owe state or federal income tax. If they agree to let you pay part of the debt, and do not actually write-off the balance, you might see it come back years later as zombie debt.

Preference (transfer) (preferential treatment): The bankruptcy code attempts to ensure fair and equal treatment of creditors. Certain gifts, payments, sales and transfers the debtor makes leading up to filing the bankruptcy can be taken back after the bankruptcy case is filed and re-distributed equally among all creditors. Particularly, payments to insiders (family members and business partners) during the year prior to filing the bankruptcy are considered preferential transfers, since the insiders were probably treated better than other creditors who are not insiders. In a plan of reorganization, the debtor must treat all creditors of the same class equally. If, for example, the plan proposes to pay a debt to a specific creditor (eg, your credit union where you deposit your earnings and owe a credit card) at a rate that is better than the rate other creditors will be paid, that would constitute preferential treatment under the plan and the plan would not be approved.

Pre-Petition: Events that occur prior to filing the Petition in bankruptcy court. In general, bankruptcy court has jurisdiction to protect the debtor from collection action by pre-petition creditors (debts that were incurred before filing the bankruptcy petition) and cannot protect the debtor from post-petition creditors. See Post-Petition.

Present value: A mathematical formula that attempts to predict the future value of a stated sum of money today. For example, if you invest $5000 in a certificate of deposit for five years, you might predict a 2% annual return and the future value would be about $5600 when the CD matures in five years. In bankruptcy, the debtor’s plan of reorganization must propose to distribute the present value of a secured creditor’s claim (debt) in deferred payments over the life of the plan. If not, the creditor is being denied the benefit and use of its money and should be permitted to liquidate (auction off) the collateral so it can get its money in hand and invest it. This requirement is for the benefit of creditors and in keeping with the principle that creditors must be treated fairly.

Presumption (of insolvency)(of abuse under Means Test)(of correctness): A presumption is a statement of fact that is accepted as being true without the need to prove it. In bankruptcy, there are three presumptions that frequently come into play. The presumption of insolvency refers to the debtor’s financial condition at the time a debt was incurred or a payment or transfer was made. There is a presumption that the debtor was insolvent (see Insolvent) during the 90 days prior to the date of filing and certain payments and transfers made during that period may be taken back and certain debts incurred during that period will not be discharged. The presumption of abuse arises in Chapter 7 cases and may render the debtor ineligible for Chapter 7 if income levels exceed local statistical earning averages according to the Census Bureau. The presumption of correctness works in favor of taxing authorities like the IRS and requires bankruptcy court to assume claims filed by the IRS (and other tax agencies) are correct as filed and must be paid according to the claims unless formally challenged in court.

Prime rate (of interest): The best (lowest) rate of interest charged by banks to their most credit-worthy borrowers. Think of prime rib (the best cut of meat). In bankruptcy, the prime rate is published in the Wall Street Journal. In reorganization cases, the debtor must propose to pay at least the prime rate of interest on the debt owed to a secured creditor, plus additional interest depending on the risk to the creditor (the credit-worthiness of the borrower). The prime rate changes over time, based on national and global economic conditions.

Priority debt: In bankruptcy, debts are classified into four categories: administrative, secured, priority and unsecured. Bankruptcy Code requires the debtor to propose a plan of reorganization that will pay priority debts in full over the life of the plan and priority debts are second in line to receive payment after administrative expenses in Chapter 7.

Pro se: For itself (for himself, for herself). A person who files a bankruptcy case without an attorney is referred to as a pro se debtor. There is no requirement to have an attorney represent you in bankruptcy and, unlike serious criminal cases, you have no Constitutional Right to have an attorney appointed to represent you. If you hire an attorney, the attorney is entitled to be compensated for services (you can’t require an attorney to represent you in bankruptcy court for free). Natural persons my file pro se, but entities (like corporations, LLCs and partnerships) may not (they must have attorney representation or the case will be dismissed by the court). More than 90% of Reorganization cases where the debtor files pro se (without an attorney) FAIL (they are converted to Chapter 7 or dismissed).

Promissory Note: A written loan agreement that identifies the parties (borrower and lender) and states the terms (the amount being borrowed, the method and time for repayment, interest and other charges that will be added to the loan and other specifics). Virtually all consumer financing involves a promissory note which the borrower must sign before receiving the credit (loan or other extension of credit).

Proof of claim (form): A standardized form (Official Form No. 10) provided to creditors in a bankruptcy case to permit them to state the amount owed by the debtor and other details. Creditors fill out and file the form under penalty of perjury (the information must be true and accurate). The debtor may dispute proofs of claim. The court may set a deadline for filing proofs of claim under various circumstances. An unsecured creditor who fails to file the form before the deadline will be ineligible to receive distribution of money from the bankruptcy estate and, if the debt is dischargeable and the debtor receives a discharge, the debt will be completely discharged. The court considers a proof of claim filed by a taxing authority (IRS and state taxing agencies) to be true and accurate just on its face, without significant proof (a presumption of correctness), and the debtor must provide to pay the claim as filed unless the claim is formally challenged in court.

Property: There are two types of property: real property (land and things attached to land) and personal property (everything else: cars, furniture, clothing, food, contractual rights and the right to sue others). In bankruptcy, the person filing must declare (describe) all property in which the debtor has any interest. The basic bankruptcy process guarantees you a fresh start by adjusting and eliminating most debt. In exchange for that benefit, you give up all your property, except the property that is exempt (protected under state or federal law). Most people do not lose any property as a result of filing a bankruptcy case.

Property tax: A tax imposed on property that is determined mostly based on the value of the property. The government has the right to sell your property if you fail to pay property tax. In bankruptcy, the tax authority retains rights in the property until the tax is paid. Past-due property tax is usually classified as a secured debt and must be paid with interest if you want to keep the property.

Publicly regulated utility company: Basic service providers (water, electricity, phone) that furnish services to the public at large. Bankruptcy Code prohibits basic service providers from interrupting service from the date of filing bankruptcy, so long as you pay the bills as they come due after filing. And the court may order the service provider to restore basic service, so long as you pay a standard deposit within a few weeks.

Purchase money security interest: An interest (lien) in property (merchandise) held by the creditor that lent the money to enable the debtor to purchase the property. For example, if the department store where you purchase a TV gives you financing for the TV, the department store retains a lien against the TV. Compare to Non-purchase money security interest.

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R

Reaffirmation: A contract that requires bankruptcy court approval to re-establish the debtor-creditor relationship between the person filing Chapter 7 and the creditor reaffirming. Reaffirmation is not mandatory, however a secured creditor (eg, car loan) may insist on a reaffirmation or else take the car back (uncommon). Without a reaffirmation agreement after Chapter 7, even your mortgage company will be prohibited from communicating with you (calling, writing, faxing), taking automatic payments, or reporting how you are paying to the credit bureaus. Reaffirmation of unsecured debts is disfavored by the court. Reaffirming a debt basically means the debt was not discharged and you will continue to owe the debt after bankruptcy, as if you did not file bankruptcy at all. Caution should be taken with all proposed reaffirmation due to the potential for adverse collection in the future.

Record (verb)(noun): Record (noun). The record reflects the history of information presented to the court in various forms, but mostly in writing. The court (judge) looks at the record to become aware of all that has been presented by the parties in the case, what decisions were made previously and what obstacles remain to reaching resolution of the case. Record (verb). The act of making a note in a list of notes memorializing an event in time, which may include the attachment of a document. In bankruptcy, recording dates are relevant for determining the classification of claims and creditors’ rights. If a secured creditor fails to record its documents on time, its lien may be voidable (rendered void) in bankruptcy.

Recoverable (preference): In bankruptcy, the person filing bankruptcy or the Trustee appointed by the court may recover (take back) certain gifts, payments, sales and transfers made prior to filing the bankruptcy. Some transactions are recoverable as a preference (eg, payments to family within the preceding year and payments over $600 to a single unsecured creditor within 90 days prior to filing).

Redemption (redeem): A procedure in Chapter 7 where the debtor can pay a lump sum payment (the value of the collateral) to a secured creditor (eg, car lender) and the creditor has to accept it and release its lien against the car. For example, if debtor owes $10000 for a car and the car is worth just $6500, the debtor can pay just the $6500 and the creditor will have to release its lien and the remainder of the debt is eliminated upon discharge.

Reinstate: To revive or re-establish a case that has been dismissed. When a bankruptcy case is dismissed, the court generally loses its power (jurisdiction) over creditors and, the person who filed the bankruptcy loses court protection. If you correct the problems that caused the case to be dismissed, you may be able to reinstate the case and regain bankruptcy court protection.

Reject (executory contract): Leases (like an apartment lease or auto lease) may be rejected (terminated) upon filing bankruptcy. If you intend to retain the property being leased, you must continue to pay the lease payments after bankruptcy. See Assume (assumption).

Release (of lien)(as in a settlement): The act of letting go. When a creditor releases its lien against your property, it is giving up its rights in the property. Bankruptcy Court has the power to order creditors to release liens. When parties to a legal dispute want to fully and finally resolve all disputes between them, they will each sign a Release (of rights) which means the party signing is giving-up (letting go of) whatever rights or claims they have against the other party.

Report of no assets: In most Chapter 7 cases, the Chapter 7 Trustee files a report with the court that reflects that no money will be distributed to creditors because there are no assets to convert to cash. Most Chapter 7 cases are called no-asset cases, because the person filing has no property that the Trustee can turn into cash. The Trustee may withdraw the report of no assets if assets are discovered within the two years after filing.

Reversion (revert): In most home mortgage financing, the mortgage company may become the owner of the property if it goes to foreclosure and no one is willing to pay the minimum foreclosure sale price (credit bid) set by the lender.

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