Unless you have specialized legal experience or other unique circumstances, there is a good change that you have never had to do any work within the Federal Court System. I’d venture to guess that a rather significant portion of the population would fall into this category, my clients included, so I wanted to put together a concise list of terms that you are likely to come across in your bankruptcy proceedings that you may not be familiar with. Here are some of the most common and important bankruptcy terms to know:
- Bankruptcy trustee: This is the person or entity, appointed by the bankruptcy court, to act on behalf of the creditors. The Bankruptcy trustee’s duties vary between Chapter 7 and Chapter 13 filings, but in general he or she reviews the debtor’s petition, liquidates property, oversees the debtor’s repayment plan, receives payments from the debtor and disburses the money to creditors.
- Credit counseling: Before you’re allowed to file for bankruptcy, you are required to speak with a credit counseling agency and completed an approved pre-filing, credit counseling course.
- Discharge: When your bankruptcy proceedings are complete, the bankruptcy is considered “discharged.”
- Exempt property: Property that you are unequivocally allowed to keep. State law determines the asset limits for what a debtor may be allowed to keep, but generally items such as personal property, vehicles, and equity in a primary residence can be exempted.
- Lien: A legal claim for assuring repayment of a debt.It is usually attached to real or personal property and is granted by the owner of the property, by law, or otherwise acquired by a creditor such as by a judgement.
- Liquidation: The sale of a debtor’s non-exempt assets. The sale turns these assets into a “liquid” form — cash — which is then disbursed to creditors.
- Means test: The Bankruptcy Code requires people who want to file Chapter 7 bankruptcy to demonstrate that they do not have the means to repay their debts. The requirement is intended to curtail abuse of the bankruptcy code. The test takes into account information such as income, assets, expenses and unsecured debt. If a debtor fails to pass the means test, their Chapter 7 bankruptcy may either be dismissed or converted into a Chapter 13 proceeding.
- Reaffirmed agreement: Under Chapter 7 bankruptcy, you may agree to continue paying a debt that could otherwise be discharged. Reaffirming the debt — and your commitment to pay — is usually done to allow a debtor to keep a piece of collateral, such as a car.
- Secured debt: Debt backed by reclaimable property. For example, your mortgage is backed by your home; for an auto loan, the vehicle itself is the collateral. Creditors of secured debt have the right to seize the collateral if you default on the loan.
- Unsecured debt: A debt for which the creditor holds no tangible collateral, such as credit cards, personal loans, medical bills, etc.
Adapted from “Bankruptcy: How it Works, Types & Consequences,” Experian.com (blog)