Words and phrases frequently encountered in bankruptcy cases

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Debt: The obligation to deliver something of value (money, property, performance of some act) to another, arising either out of statute, rule, contract or as a result of exchanges of benefits and burdens, even where there is no written contract. See Debtor and Creditor.

Debtor: In bankruptcy, the Debtor is the individual or entity (corporation, LLC, partnership, cooperative, trust) whose affairs are administered under court supervision. If eligible, at the end of the bankruptcy process, the Debtor will receive a Discharge (forgiveness) of debt. While most cases are voluntary (commenced by the Debtor who files a Petition for Bankruptcy Relief), under specific circumstances, creditors may come together and file a bankruptcy case on behalf of (against) a Debtor in order to force the administration of the Debtor’s estate under court supervision (rare). Citizenship or documented immigration status is not a requirement to be a Debtor in bankruptcy. There are time limits for eligibility to receive a discharge (relating to the time between the commencement of successive bankruptcy cases) and the Court may declare a Debtor ineligible for future bankruptcy court protection where the Debtor has willfully failed to perform the duties of a Debtor in bankruptcy, failed to comply with court orders or engaged in conduct that reflects “Bad faith”.

Debtor in possession: When you file Chapter 11, Chapter 12 or Chapter 13, you are known as “Debtor in possession”, which leaves all the essential decision-making authority about your property and financial affairs in your control and some transactions involving your property and money require court approval while the case is pending. The Debtor in possession must act in the best interest of creditors and avoid waste (loss, theft, destruction) of estate assets.

Deed: A deed is a document that describes a specific piece of real estate and, when properly prepared and recorded (submitted for filing with the county recorder’s office), identifies and establishes the owner of an interest in real estate (like the title to an automobile identifies the title-holder or owner). There are several varieties of deeds that achieve various purposes and provide varying levels of protection and produce distinct effects on the state of ownership of the land in question (for example, a quit-claim deed is the least-protective form of conveyance, which merely conveys whatever interest the transferor owns, but does not guarantee that the transferor owns any interest at all).

Deed in lieu (of foreclosure): At the point in time when a mortgage lender has the right to foreclose (or will soon have the right to foreclose) because the borrower is not paying the mortgage, as an alternative to foreclosing, the lender may be willing to accept a Deed in lieu (that is, a Deed from the borrower, where the borrower transfers the property to the lender, instead of forcing the lender to go through with the foreclosure). The benefits may include avoiding future negative credit reporting and preserving the value of the property (and neighboring properties). Especially when the borrower no longer lives in the property, a Deed in lieu of foreclosure can offer significant advantages over the foreclosure process. However, any agreements relating to a deed in lieu should be reviewed by your attorney to avoid complications.

Deed of Trust: A deed that authorizes the mortgage company to conduct a foreclosure (Trustee Sale) if the borrower fails to pay mortgage payments. When the mortgage has been fully paid, the mortgage company re-conveys (transfers) the deed of trust back to the borrower. The mortgage company is generally free to transfer (assign) its rights under the deed of trust to another mortgage company, and then the borrower is obliged to pay payments to the new mortgage lender (or servicer).

Deficiency: The balance of a loan after the collateral has been liquidated (auctioned) or destroyed. For example, if you owe an automobile loan with a $15,000 balance and you fail to pay the car payments, the lender has the right to repossess the vehicle, take it to an auction and sell it to the highest bidder. If the highest bidder pays just $10,000, there will be a balance of $5,000 left on the loan and the lender has the right to collect it from you. Similarly, if the vehicle is stolen or destroyed and the insurance company is only willing to pay the lender $10,000, there remains a balance of $5,000 (the deficiency).

Discharge (of Debt): If the Debtor in bankruptcy fulfills all the duties imposed under the bankruptcy code and is eligible, the Court may give the Debtor a Discharge of Debt, making it illegal for creditors who had claims against the Debtor on the date of commencement to take any action to collect the debt from the Debtor. The discharge protects the debtor, but does not protect collateral (secured creditors, like the mortgage company, continue to have rights in the collateral and may collect against it unless they get paid in full satisfaction of their rights, which may be adjusted during the bankruptcy process). Some debts are not discharged: certain taxes, student loans, back child support and alimony, criminal fines, court costs and restitution, debts incurred by fraud, and a few other narrow exceptions apply. The origin of the expression relates back to the days of debtor’s prison, where individuals who failed to pay their lawful debts could be jailed as punishment (after you served your sentence, you were discharged).

Dischargeable debt: All debts and obligations of the Debtor as of the date of filing will be discharged (eliminated) when the court enters the Discharge, with the exception of certain debts identified in the bankruptcy code as non-dischargeable. Creditors have the right to file an objection asking the court to deny the Debtor a discharge of debts that were incurred by fraud and where debts were incurred shortly before filing the bankruptcy case with no apparent intent to repay.

Discretionary income: In Chapter 13, the difference between the Debtor’s schedule of income and schedule of expenses (for example, if the Debtor’s net monthly income is $4,000 and total monthly living expenses is $3,500, the discretionary income is $500)

Dismissal (dismissed): Court cases have predictable life-cycles (beginning, middle and end). In bankruptcy court, if the Debtor is not eligible or does not perform the duties necessary to qualify for a Discharge of Debt, the case must eventually result in dismissal (be dismissed). When the case is dismissed, the court no longer has jurisdiction over the Debtor’s property and the Debtor loses the protection of the automatic stay (bankruptcy court protection). Sometimes, the largest disputes get resolved while the case is pending and, depending on the Debtor’s long-term needs and objectives, it might be preferable to dismiss the case rather than continue to pursue a Discharge. In general, you may dismiss your Chapter 13 case as a matter of right (there is rarely basis to oppose a motion to dismiss filed by the Debtor). Chapter 11 can also be dismissed by the Debtor, however Debtor will be required to comply with the United States Trustee’s reporting requirements by filing all monthly operating reports. The Debtor does not have an absolute right to dismiss a Chapter 7. In general, the court will reinstate a case that has been dismissed once the Debtor complies with all requirements and cures any defects in the record of the case, but reinstatement may also require the approval of the Trustee assigned to the case.

Disposable income calculation: One of several requirements in Chapter 13 that determine how much the Debtor must pay the Trustee over the course of the Plan. In Chapter 13, if the Debtor’s income during the six months prior to filing the case is, on average, greater than the Median Household Income for a household of the same size, bankruptcy code requires the Debtor to calculate Disposable income using a formula that begins with the average gross (before tax) income for the six month period and then deducts specific allowances set forth in the law, resulting in a number that is either negative (less than zero) or positive (greater than zero). If the result is greater than zero, the Debtor must provide to distribute that resulting number times 60 to unsecured creditors over the course of not more than 60 months.

Distribution (to creditors) (aka dividend): Generally referring to payments made to creditors throughout the bankruptcy process, either by the Trustee or directly by the Debtor.

Domestic support obligation: Child support, alimony, maintenance

Durable goods: Goods that retain value over time, such as home electronics, appliances and furniture, as compared to food, clothing and fuel which is rapidly consumed and loses value quickly.



Equitable interest (title) (owner): You can be the equitable owner of property that is titled to someone else, specifically if you paid for it, purchased it, received it by gift, acquired it by whatever means and you (along with everyone else) consider the property to be yours), you are the true “owner”, even though it is titled to someone else. An equitable interest in property is an asset, regardless of how the asset is titled. One can have “equitable title” and be the “equitable owner” of something that is titled to someone else.

Equity: A way of expressing the true value of ownership by subtracting the amount of debt owed against collateral from the market value of the collateral For example, if your home is worth $200,000 and you owe $100,000 on the mortgage, you have $100,000 equity.

Escrow: With most mortgage loans, the lender requires the borrower to include a sum of money with each monthly payment which will be set aside for purposes of paying home owners’ insurance and property tax. As tax and insurance requirements change over time, the mortgage lender recalculates the amount that is required on a monthly basis to pay the property tax and insurance and notifies the borrower.

Estate (bankruptcy) (probate): See Bankruptcy Estate. Similar to a probate estate which deals with the decedent (the person who died), the bankruptcy estate consists of the property and debts of the debtor. The bankruptcy estate is administered by a Chapter 7 Trustee in Chapter 7 and by the Debtor in other chapters. In probate, it is administered by a representative (known as personal representative, executor or administrator) who is responsible for collecting the property, identifying the debts, converting the property to cash and distributing it to creditors. Bankruptcy estates and probate estates have similar functions and follow similar procedures.

Executory contract: An agreement where the performance of the parties is incomplete (the parties continue to owe duties to each other). For example, a landlord and tenant are parties to an executory contract (lease) where the lease has not expired and each owes a duty to the other (the tenant owes a duty to pay rent to the landlord, the landlord owes a duty to let the tenant possess the property and maintain basic services). When you file bankruptcy, you may either Reject or Assume such contracts.

Exempt (exemptions): Property that is protected from the reach of creditors under some provision of state or federal law. Property that is exempt is not available (out of reach, off limits) to creditors outside bankruptcy and the bankruptcy Trustee does not have the right to liquidate it (sell it) to turn it to cash for distribution to creditors if you file Chapter 7. Federal and state law provide exemptions and each state makes laws relating to exemptions (some states’ protections are more favorable than others). Which state’s exemptions you are eligible to claim depends on where you resided during the two years prior to filing a bankruptcy case.

Expense (monthly living): Along with income, the Debtor in bankruptcy must disclose average, regular monthly living expenses like utilities, food, gasoline and auto insurance. Debts are different from expenses (everyone has expenses, not everyone has debts).



Fair market value: The price (value) a willing buyer, who is under no pressure to buy, would pay for the property in question, and what a willing seller, who is under no pressure to sell, would accept for it. In bankruptcy, the value stated for property is supposed to be the fair market value, which is different from purchase price, replacement value or insurance value. For example, the retail list sale price of a used automobile at a dealership might be $16,000, but the fair market value might be just $13,000, since the retail sale environment forces prices upward to make money to operate the dealership and pay sales commissions.

Fee application: Professionals who render services to the Debtor in bankruptcy must disclose the amount, source and terms of the fee agreement and, when fees sought are in excess of customarily approved charges, they must seek court approval of the fee agreement. In Chapter 13, the courts typically adopt a standard for a “no look fee”, which is the fee that is regarded to be reasonable without specifically itemizing all the services rendered for the Debtor. The “no look fee” in Arizona is $4,500.

Foreclosure (trustee sale): The process of eliminating a mortgage borrower’s interest in the land and improvements (house) that are pledged as collateral for a mortgage loan after the borrower has failed to make mortgage payments or perform some other duty to the mortgage lender. The property may be sold without judicial intervention utilizing a deed of trust (commonly the case in Arizona) or the sale may be conducted by court order (judicial foreclosure). If the borrower qualifies, filing a Petition for Bankruptcy Relief makes it illegal for the sale to be conducted while the case is pending unless the creditor obtains bankruptcy court permission first.

Fraud: An intentional course of conduct in which one procures something of value from another by misleading the other with false or incomplete information, upon which the other reasonably relied. If you are the victim of fraud, you have a cause of against the individual who defrauded you to recover the money or other thing of value that was taken from you. Fraud may also be the basis for a criminal prosecution which could result in incarceration and court-ordered restitution. Committing fraud while applying for credit may constitute a federal crime. Bankruptcy court can deny discharge of debts incurred by fraud.

Fraudulent conveyance: The transfer of something of value without receiving substantially the same value in exchange (that is, giving up ownership without receiving the actual value of the thing transferred). In bankruptcy court, the Trustee and the Debtor in possession may have a cause of action to recover (take back) property transfers that constitute fraudulent conveyances. For example, if you sell an automobile worth $10,000 in exchange for just $2,000 and then file a bankruptcy case within two years after the sale, the Trustee in bankruptcy can sue the purchaser and take it back since you did not receive full and fair value.



Garnishment: When a court issues a judgment in favor of a creditor and against a debtor, establishing officially that the debt is a valid, enforceable obligation, the creditor may, at its election, attempt to determine where the debtor is employed and ask the court for an order directing the employer to withhold up to 25% of the debtor’s net pay each pay period. It is possible to earn too little to be subject to garnishment. Welfare and retirement income is generally protected from garnishment. Bankruptcy protection shields wages earned after the bankruptcy case is filed.

Gift: A transfer of money or property intended to be a final, irrevocable conveyance of ownership with no expectation of receiving anything in exchange. Gifts made by the Debtor in bankruptcy during the year prior to filing the bankruptcy case may be recovered (taken back) by the Trustee.

Gross income: The total of income without reduction for taxes or other withholdings. You must declare your gross income three times in your bankruptcy papers reflecting historical totals and your expected future income. Gross income is the starting point for the Means Test in Chapter 7 and the Disposable Income Calculation for Chapter 13.

Guarantor: The same as Co-debtor and Co-signer. If an individual does not qualify to obtain credit based on their circumstances and credit history, the lender may insist that the borrower have the backing of a guarantor who is responsible for the debt if the borrower fails to pay.



Hardship discharge: In Chapter 13, after the Debtor has paid allowed secured, administrative and priority claims, if circumstances are such that Debtor would suffer unnecessary financial strain, deprivation or hardship while making payments to the Chapter 13 Trustee before completing the plan and receiving the discharge, and if no creditor objects, the Debtor may ask the court to enter a hardship discharge effectively shortening the time the Debtor will remain in Chapter 13.

Home owners association: When neighborhoods are first planned, if the zoning authority requires it, or if the housing developer elects to do so, the original deed to each parcel in the development will contain provisions that establish a local land management company (like a landlord, entitled to collect rent) referred to as a "home owners association", which will have the authority to assess and collect fees from parcel owners, restrict the manner and style of construction in the development, regulate maintenance and use of the houses and land in the development, enforce liens against parcels (including judicial foreclosure), enforce collection against parcel owners (including garnishment) to collect assessments, and formulate and enforce rules and policies for the development. Home owners associations are quasi-governmental.



Impaired creditor: A creditor who is receiving less under a plan of reorganization than it is entitled to according to the original loan agreement.

Income: An increase of wealth (when something of value comes into possession). Wages, tips, salaries and commissions are all examples of income. Welfare, retirement, gambling winnings, personal injury settlements, inheritances, gifts and found money are all examples of Income. Income is stated in various ways in papers filed by the Debtor in bankruptcy court.

Injunction (automatic stay) (permanent discharge): A court order that directs (or prohibits) specific action. The automatic stay is an injunction issued by bankruptcy court when the case is filed that protects the Debtor from collection while the case is pending and the permanent discharge injunction goes into effect upon entry of the Discharge and protects the Debtor from collection of discharged debts permanently. A restraining order is an injunction.

Insider: Generally, a family member or business partner of the person filing bankruptcy. 11 USC 101. Payments by the debtor to insiders and transactions involving insiders must be disclosed and the Trustee may reverse some transactions to take back money or property and distribute money to creditors.

Insolvent: When the sum of your assets is less than the sum of your debts and you are unable to pay debts as they come due in the ordinary course of business.

Installment sale contract: An agreement between a seller (eg, an auto dealer) and a buyer where the seller agrees to accept payments over time, adding interest to the sale price and allowing the seller to retain certain rights in the property until the full balance is paid. See also Land Sale Contract.

Interest (contract)(statutory)(judgment)(In re Till): The price you pay for borrowing money. In virtually every relationship where there is a borrower and a lender, the lender requires the borrower to agree to pay interest. For example, if you borrow a neighbor’s lawnmower, you would expect to compensate your neighbor for the use of the mower (wear and tear). It’s the same when you borrow money. The lender will want it back and you are going to be obligated to pay them extra for getting the use of the money. In some cases, state law allows the lender (or creditor) to add interest to the amount owed by the borrower (debtor) even if there is no written contract (for example, a Home Owners Association has the legal right to impose charges on the owner of the real estate and add interest to the charges, file suit and obtain a judgment for the growing charges, and the amount owed on the judgment grows according to the judgment rate of interest). In a written loan agreement (promissory note), the lender and borrower agree to specific terms that establish the rate of interest and whether it will be fixed or variable. Fixed interest or a “fixed rate of interest” remains constant (the same rate) throughout the life of the loan. A variable rate changes over the life of the loan and is usually tied to a globally significant interest rate like the Prime Rate of Interest, the Federal Reserve Rate and the LIBOR. Variable rates change periodically as the corresponding external rate changes. In bankruptcy, the debtor may propose a plan to pay a rate of interest that is lower than amount previously agreed upon, within limitations. The lender may object and, naturally, the lender argues in favor of higher rates and the borrower always seeks a lower rate. The US Supreme Court decided the question in In Re Till, which holds that in Chapter 13 you may pay just the Prime Rate of Interest with up to three additional points of interest depending on the degree of risk the creditor faces by being forced to wait to get paid (rather than take back and auction off the collateral).


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