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Words and phrases frequently encountered in bankruptcy cases

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J

Judgment: A written decision of a court that resolves a dispute or controversy and becomes final (irreversible) after one year unless appealed or challenged within applicable time limits according to the rules of procedure. Grounds for challenging a judgment shortly after it enters include alleging the judge made a mistake of fact or law, or would have decided the issue differently based on newly discovered evidence, or that the court granted judgment based on false evidence. A creditor who obtains a judgment is known as a “judgment creditor”.

Judgment creditor: A creditor (the owner of a claim for money against you) who has obtained a Judgment. A judgment creditor has the right to take action directly against your property (your wages, money in the bank, investments, real estate, automobiles) including garnishment, seizure and public sale (auction).

Judgment debtor exam: When a creditor obtains a judgment against you, the creditor may have the court issue an order for you to appear and answer questions about your income and assets and provide documents like tax returns and bank statements. It is a mostly informal proceeding, typically in offices of the creditor’s attorney, and you may bring your own attorney. If you fail to appear and cooperate with a judgment debtor exam, the court may issue a civil arrest warrant.

Judgment lien: A creditor who obtains a judgment may record (file) a copy of the judgment with the public records (recorder’s) office and, frequently, the judgment will then have the same effect on your real estate as a mortgage – it becomes a lien (a charge) against your ownership interest in the real estate. Judgment liens pose an obstacle to selling and refinancing the real estate, since it means the judgment creditor owns an interest in the real estate too and has to approve of the sale (and will require payment before it approves). Bankruptcy court has the power to render judgment liens void.

Junior lien holder: When a creditor obtains a lien (a form of ownership) against property, the rights it obtains are less than those of a creditor who obtained a lien at an earlier time. Most common examples include second mortgage, home equity line of credit, home improvement loan, pool loan, which are all inferior (junior) to the first mortgage.

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L

Land sale contract: An agreement between the owner of a piece of land (house and lot, for example) and someone who wishes to purchase it which provides that the owner (seller) agrees to sell the real estate to the buyer on specific terms, typically involving a down payment and payments over time that include interest. The seller does not transfer the deed (title) to the land to the buyer until all (or some portion) of the payments have been paid. If the buyer fails to pay scheduled payments, the seller may terminate the agreement and retain money paid as if it were rent, and eject the non-paying buyer out of the property. When the buyer/debtor fails to perform (pay) under the contract, the seller/creditor in a land sale contract faces less expense and delay re-taking the collateral (land) than a traditional mortgage lender.

Lease: An agreement between the owner of property (land, apartment, house, car, TV) and someone who agrees to use the property for a period of time and then return the property, which requires user (lessee) to compensate the owner for use of the property and comply with other terms of the lease, like maintaining insurance on the property and keeping it in good condition. If the lessee fails to pay lease payments and comply with other conditions of the lease, the owner (lessor) may terminate the lease, take back the property and demand the remaining un-paid payments due under the lease. In bankruptcy, the debtor can chose to continue to perform (pay, etc) under a lease or terminate (reject) the lease and have no further financial responsibility. Some rent-to-own agreements blur the line between a lease and an installment sale contract and are referred to as “dirty leases”.

Levy: When you fail to pay taxes, taxing authorities like the IRS and the Arizona Department of Revenue can seize your money wherever they find it. Unlike other creditors who must obtain a judgment against you before they can seize money, the tax authorities have the right to take your wage and your deposits without a court order. Like a lien, a levy diminishes your ownership interest in property and once the property is taken it is rarely recoverable (you can rarely get back property that has been levied).

Lien: A type of ownership. An interest in property that diminishes the primary owner’s interest. A lien-holder is like a co-owner, since the lien-holder will have rights in the property until the lien is released or avoided (rendered void). Although you can transfer most property even though there is a lien against it, the transferee will receive the same non-exclusive rights you have in the property.

Lien strip: In bankruptcy, the court may determine that a lien-holder’s lien is avoidable (may be rendered void) and destroy the lien-holder’s interest in the collateral. For example, if you have a first mortgage of $100 thousand and a second mortgage of $50 thousand and the house is worth just $100 thousand, there is no value for the second mortgage to attach to and the court may declare the second mortgage void. The same applies to other types of property.

Liquidation (process) (value): The bankruptcy trustee appointed by the court to represent the interest of creditors may sell certain property of the debtor to generate money to pay creditors. Typically, once the Trustee identifies property that is available to be auctioned off, the Trustee demands to have possession of the property and then schedules a public sale. In the disclosures the debtor files with the bankruptcy court at the outset of the case, the debtor must state the value of all property. Liquidation value is the amount of money the debtor expects someone will pay for the property at a public sale (auction).

Liquidation Test: One of several tests a plan of reorganization must pass in order to get the plan approved by the court. The liquidation test requires that the reorganization plan propose to distribute at least as much to unsecured creditors (credit cards, medical bills) as they would receive if, instead of reorganization, the debtor were going through liquidation (by a Chapter 7 Trustee, who would auction off debtor’s un-protected property).

Loan modification: A document signed by both borrower and lender that modifies the terms of the original loan agreement. Almost every contract may be modified (changed) if the parties (the lender and borrower) agree to the changes in writing. A settlement that reduces the amount the creditor agrees to accept to satisfy the obligation and discharge the borrower from further liability is a form of loan modification.

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M

Means test: In bankruptcy, the Means test evaluates the debtor’s income leading up to the date of filing and, if the debtor fails the test, the debtor may be ineligible for Chapter 7 bankruptcy. The Office of the United States Trustee is responsible for evaluating Chapter 7 cases to determine if debtors pass the Means Test. The formula in the test starts with the debtor’s gross income during the six months prior to the Chapter 7 case being filed. Starting with the average gross income for that period, the formula then subtracts various reductions which are based mainly on IRS standards. After all the reductions, if the amount left over exceeds the limit, the debtor fails the test and should not file Chapter 7, unless there are extenuating circumstances. When the debtor fails the means test, the United States Trustee files a motion to dismiss or convert the Chapter 7 case to another chapter.

Median household income: A statistic that reflects the mid-point (the number in the exact middle of the numbers above and those below) reported by the United States Census Bureau, indicating the mid-point for household income (total gross income for a household of the same size as the debtor’s) in the debtor’s state of residence. If the debtor’s average gross income for the six month prior to filing bankruptcy is above the median household income, additional disclosures, calculations and rules apply to the bankruptcy case.

Meeting of Creditors: In every bankruptcy case, about six weeks after the case is filed, the person filing bankruptcy must appear for a brief meeting where a court appointed official verifies the filer’s identity by examining government issued identification (drivers license) and proof of social security number (social security card or W2). The debtor must also take an oath and acknowledge the papers filed in the case and verify a few facts necessary to qualify for bankruptcy. Creditors are not required to appear at the meeting of creditors and do not lose any substantial right if they fail to appear (they have the same rights whether they appear or not). If the debtor does not appear, the case may be dismissed (thrown out). The average meeting of creditors lasts five minutes or less.

Modification (loan)(plan): The process of changing the terms of an agreement or course of dealing, as in loan modification or plan modification. In bankruptcy, if your circumstances change during the course of the bankruptcy, you may modify your plan of reorganization to seek more favorable terms.

Moratorium: A temporary suspension of the obligation to make payments under a plan of reorganization. During your chapter 13 plan, if your ability to make plan payments is interrupted (by job layoff or catastrophic demand for payment like emergency medical or car repair expenses, for example), you can ask for a moratorium during the period of your inability to pay, and recalculate and reschedule the missed payments over the remaining term of your plan (maximum 60 months).

Motion: A request for judicial action or acknowledgment. In a court proceeding, a motion is a request, usually in writing, asking the court to take action (make a decision, issue an order) or recognize and adopt a position on a subject relevant in the case. Typically, motions may be granted without a hearing if no one opposes the motion and if the relief asked for is not illegal. In almost all cases, the court will not grant a motion until all those whose rights may be effected receive a copy of the motion and have an opportunity to respond (usually not less than two weeks’ notice).

Motion for relief from the automatic stay: A motion filed in bankruptcy court by a creditor seeking permission to proceed to collect a debt, usually involving the collateral that secures the debt like a home or car, or to proceed in another court to take action involving the debtor’s property, like a divorce proceeding.

Motion to dismiss: A motion seeking to dismiss (throw out) a case pending in a court. In bankruptcy, a motion to dismiss may be filed by a creditor, the Trustee and the debtor under limited circumstances. Grounds for dismissal include failure to cooperate with the Trustee, provide documents, file all required disclosures and reports, and acting in Bad faith (lacking sincerity of purpose in invoking bankruptcy court protection). The United States Trustee may file a Motion to Dismiss or Convert when a Chapter 7 debtor fails the Means Test.

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N

Necessary for successful reorganization: Bankruptcy court has the power to deny a secured creditor the right to repossess and sell (or foreclose) its collateral (for example, an automobile or house) even where the debtor has failed to make payments, so long as the debtor resumes payments (even if not full payments) and demonstrates that the property in question is necessary for the debtor to be successful under a plan of reorganization (Chapter 11, Chapter 12 and Chapter 13). For example, even where the debtor’s plan proposes to pay less than the full balance of an auto-loan at an interest rate that is less than the contract rate, the court may overrule the car lender’s objection to the plan on grounds that the vehicle is necessary for an effective reorganization if the vehicle is the primary means for debtor to get to and from work.

Negative equity: The amount of a loan that exceeds the value of the collateral and which gets included in the re-finance or new financing on the same or different collateral. For example, if you owe $15000 against a vehicle that is worth $5000 and you want to trade it in for a newer vehicle that will cost $25000. The dealership will give you a $5000 trade-in for your old car, lend you $20000 to complete purchase of the new car, and tack the $10000 left over from the original loan on to the new loan, leaving you owing $30000 for the new car that is worth just $25000. The $5000 you owe in excess of the new car’s value is negative equity.

Net income: The amount of money left over after tax and other reductions (like health insurance and union dues) are deducted from Gross income.

Non-dischargeable debt: Debts that are not eliminated (discharged) at the end of a bankruptcy case. Bankruptcy Code contains a list of non-dischargeable debts at 11 U.S.C. 523 and they include certain taxes, back child support and alimony, criminal fines, court costs and restitution, debts arising out of a divorce decree, separation agreement or property settlement agreement, debts incurred by fraud, debts incurred while driving impaired (for damages) and debts incurred by willful and malicious conduct (like pushing someone down the stairs). There are a few other narrow exceptions. Some debts are dischargeable in Chapter 13 that are not dischargeable in Chapter 7. Debts in the list of non-dischargeable debts are automatically non-dischargeable and the creditor does not have to take any special action to avoid seeing their claims discharged.

Non-exempt asset: In bankruptcy, the person filing bankruptcy (the debtor) receives certain benefits from the process and, in exchange, has to make certain sacrifices. For example, the debtor must pay a filing fee and, in most cases, attorneys fees and the debtor will be restricted from filing another bankruptcy in the future (eight years between Chapter 7 cases, four years between Chapter 7 and Chapter 13, and two years between Chapter 13 cases) and the debtor agrees to turn over all property that is not protected by state or federal law from creditors. Those sets of laws that protect property are known as exemptions. Property that is protected is known as exempt property, while property that is not protected is known as non-exempt property. In Chapter 7, the court appoints an official (Trustee) to gather up the debtor’s non-exempt property, sell it and distribute the money to creditors. In Chapter 13 and Chapter 11, the debtor may retain non-exempt property so long as the plan of reorganization proposes to distribute the value of the non-exempt property to creditors over the course of time.

Non-purchase money security interest: Creditors may obtain and retain rights in your property until you repay a debt, in order to insure that they get paid (for example, an automobile lender retains a lien against the title to the automobile until you have paid the car loan in full. And if you fail to pay, they can repossess the car and sell it to repay as much of the debt as they can). Depending on the type of property, the legal steps a creditor must take in order to obtain its security interest (lien) in the property vary. For some, the lien arises automatically. For example, if you purchase durable goods (eg, washer and dryer) at a department store and the store lends you the money to make the purchase, the store automatically obtains a lien against the washer and dryer and, technically, if you fail to repay the loan the creditor may repossess the washer and dryer. This kind of lien is known as a purchase money security interest. When you already own the property, and a lender requires collateral to secure the loan, and you agree to pledge it as collateral and give the creditor a lien against it (eg, a title loan), the creditor obtains a non-purchase money security interest. Some non-purchase money security interests are avoidable (can be rendered void) in bankruptcy court.

Notice: Our legal system relies fundamentally on a process of giving those who will be affected by a legal proceeding notice (information) about the proceeding and allowing them an opportunity to object to the proposal. For example, the basic procedure in a law suit is for the plaintiff (the person who is suing) to file a written demand (complaint) stating what action or decision is being sought, then deliver a copy of the written demand to the people (defendants) against whom the demand is made and demonstrate to the court that they have received a copy of the demand. Then, after a period of time (20-30 days in most cases), if the defendants do not respond (answer or object), the plaintiff may ask the court to grant the relief requested in the complaint. When a party who is going to be affected by court action does not receive notice, they have grounds to set aside court decisions that adversely affect them.

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O

Oath: At various stages of court proceedings, persons presenting information to the court are required first to solemnly promise to tell the truth. Usually, the promise is recorded either on paper, electronically or by a court reporter. In bankruptcy. The debtor in bankruptcy takes a written oath contained in the disclosures (Schedules and Statements) when signing them. The declaration signed by debtor says the information is true, correct and complete. Debtor then takes the oath again at the Meeting of Creditors and again confirms the disclosures are accurate. Failure to make true and complete disclosures in bankruptcy court constitutes perjury under federal law and is punishable by five years in prison and a $250,000 fine.

Objection (to plan)(to discharge): A response to a proposal rejecting it. Creditors have rights in the bankruptcy process, principally the right to object to the proceedings. In Chapter 7, a creditor may file an objection to discharge of the debtor on various grounds, mostly relating to the debtor’s conduct surrounding the extension of credit (for example, if the debtor gave the creditor false information in the loan application, the creditor has grounds to object to the discharge of that debt). In Chapter 13, a creditor may object to the plan of reorganization (for example, if the debtor owes $10000 on a car loan and proposes to pay just $5000 in satisfaction of the creditor’s loan, but the vehicle is actually worth $7500, the creditor may object to the plan and demand that the debtor pay $7500).

Official Forms: Forms prescribed by the Federal Judicial Conference (an office of the United States Federal Judiciary) for filing in bankruptcy courts, which require the individual or entity filing bankruptcy to disclose and identify all assets, debts, income, expenses and facts concerning financial affairs leading up to the date of filing, focusing primarily on the two year period prior to filing. Official Forms will change significantly as of December 1, 2015, requiring substantial additional disclosures.

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