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Bankruptcy terms

Bankruptcy Vocabulary

In the course of filing a bankruptcy, the individual will be exposed to a whole new vocabulary that requires basic understanding.  The following definitions are not strict legal definitions but are intended to provide a basic understanding of the concept:

  • Automatic Stay – After a case is filed, creditors cannot take actions to collect on a debt that is subject to the bankruptcy. Actions to collect debts may include telephone calls, emails, collection letters.  Other more severe actions to attempt to collect a debt may include turning off electrical, gas, water, telephone, cell service, cable and internet service; repossession of vehicles, placing a boot on a vehicle, filing a lawsuit, taking action in a pending lawsuit, and foreclosure on a home.  If they have a basis to proceed with collection, they must first obtain permission from the bankruptcy court by filing a motion to “modify the stay”.
  • Confirmation Hearing – Court proceeding in Chapter 13 cases usually within two months after the Creditors' meeting.  Court will accept or reject the Chapter 13 Plan.  Generally, Debtor doesn't attend.
  • Creditor – The company or person to whom the debtor owes money.
  • Creditors meeting – Meeting with the Trustee and, possibly, with creditors.  Usually one month after filing. The Debtor must attend this meeting (with their attorney).
  • Debtor – Term used to refer to the person or couple filing the bankruptcy.
  • Discharge – Refers to the elimination of debt in a bankruptcy.  In a typical Chapter 7 case, the debtor will receive a discharge about 3 months after filing.  A discharge would mean that all unsecured debts, not otherwise objected to, would be wiped out and creditors would no longer be able to attempt to collect on those debts.  In a typical Chapter 13 case, the debtor will receive a discharge about 3 to 5 years after filing as long as they have completed all payments proposed in their Chapter 13 Plan.
  • Dischargeable – Debts that can be discharged by the Bankruptcy Court.
  • Dismissal – Refers to a case being “thrown out” prior to the granting of a discharge. For example, if a debtor fails to appear for a creditor's meeting, the court could dismiss the case.
  • Non-dischargeable Debt – Certain debts are of a type that are NOT subject to the bankruptcy discharge. Examples include but are not limited to: “Domestic Support Obligations” which are generally child support or maintenance, student loans, certain taxes, fines, and penalties.  There are many types of debts which may be non-dischargeable, and it is important to consult with an attorney to determine if a debt may be non-dischargeable,
  • Personal Exemptions – Currently in Illinois, the debtor is allowed to shield a certain value is certain assets from creditors. For example, an individual debtor can “exempt” $1,500.00 from the net proceeds of the sale of their home. That means that equity is exempt from the reach of creditors.  There are exemptions for other personal property, for instance, vehicles, retirement, clothing, etc.  There are also several other exemptions which your attorney can explain to you.
  • Personal Property – Refers to all property that is not real property. For example, assets such as bank accounts, furniture, automobiles, and retirements accounts are all considered to be personal property.
  • Pre-Petition – The time frame PRIOR to filing the case
  • Priority Unsecured Debts – The code places different types of debts into different categories for purposes of receiving distribution from proceeds. In effect, certain creditors get to move to the front of the line if money is paid out of the bankruptcy estate. Thus, priority unsecured debts are ahead of general unsecured debts.  Examples included: alimony, child support, and certain taxes.
  • Post-Petition – The time frame AFTER filing the case.
  • Reaffirmation – The act of filing a Chapter 7 bankruptcy case results in the termination of personal liability certain loan agreements. The act of reaffirming a loan agreement, such as for an automobile loan, has the effect of the Debtor agreeing to have personal liability for the debt and the Debtor is no longer protected from liability once the Discharge is Entered. Debtors who wish to keep their car and continue paying for it often sign reaffirmation agreements.  Also, Debtors that wish to have a car loan or mortgage loan reported on their credit report may want to reaffirm those debts.  It is important to consult with your attorney prior to entering into any reaffirmation agreements.
  • Real Property – Refers to real estate such as a house, vacant lot, investment property or any interest therein.
  • Redemption – On occasion an asset such as a car may be worth much less than the outstanding loan balance, making a reaffirmation impractical. The code allows the debtor to pay the creditor off in a lump sum by paying what the asset is worth rather than what is owed which often results in substantial savings for the debtor. The problem, however, is that most debtors in bankruptcy cannot borrow money to pay off the creditor and they do not have any practical means to take advantage of a redemption.  There are certain lenders that specialize in redemption financing provided one can meet the lender's criteria.
  • Secured Debts – If you borrow money to buy an item, it may be a secured debt. A house secures a mortgage. A car secures an auto loan.  If the loan is not paid and the creditor has a right to foreclose or repossess the asset, it is a secured debt.  If you put up collateral for a loan, it is a secured debt.
  • Surrender – The debtor has the option of giving up the secured asset instead of reaffirming or redeeming it. An example would be a second car that isn't needed or a car that doesn't run.
  • Unsecured Debts – Refers to debt that is not collateralized by any assets. This would typically be credit card debt, medical bills, or personal/signature loans.
  • 341 meeting/Creditors' Meeting – Every debtor in bankruptcy must participate in a meeting with the trustee and creditors. More often than not, the creditors do not attend the typical consumer creditor meeting. The trustee will examine the debtor under oath about the petition and its contents.  The debtor must provide the trustee with photo ID and proof of social security number at the beginning of the meeting.  The debtor's attorney will be present at the meeting but usually doesn't participate in the proceedings as the examination is for the debtor not the attorney. 

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