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Bankruptcy Glossary

Common bankruptcy terms explained in plain language.

Abandonment: When a bankruptcy trustee gives up any claim to a debtor's property, typically because the asset has no value for creditors after applicable exemptions. Once abandoned, the property returns to the debtor's control.
Adequate Protection: Payments or other assurances given to a secured creditor to protect their interest in collateral during the bankruptcy case. This ensures the creditor's position does not deteriorate while the automatic stay is in effect.
Adversary Proceeding: A lawsuit filed within a bankruptcy case, often to determine the dischargeability of a specific debt, object to a debtor's discharge, or recover property. It functions like a separate civil case with its own complaint and answer process.
Automatic Stay: A court order that goes into effect immediately upon filing a bankruptcy petition, halting most collection actions including lawsuits, wage garnishments, foreclosures, and creditor phone calls. The automatic stay provides the debtor breathing room while the case proceeds.
Bankruptcy Code: Title 11 of the United States Code, the federal law governing all bankruptcy cases in the United States. It establishes the rules, exemptions, and procedures for Chapter 7, Chapter 13, and other bankruptcy chapters.
Bankruptcy Estate: All of the debtor's legal and equitable interests in property at the time of filing, including real estate, personal property, financial accounts, and certain claims. The estate is administered by the trustee for the benefit of creditors.
Bankruptcy Petition: The official document filed with the bankruptcy court to begin a bankruptcy case. It includes the debtor's identifying information and triggers the automatic stay and creation of the bankruptcy estate.
Chapter 11 Bankruptcy: A reorganization bankruptcy primarily used by businesses that allows the debtor to restructure debts while continuing operations. Individuals with very large debts may also file under Chapter 11 if they exceed Chapter 13 debt limits.
Chapter 13 Bankruptcy: A reorganization bankruptcy for individuals with regular income that allows the debtor to keep property while repaying some or all debts through a 3-to-5-year repayment plan. It is often used to catch up on mortgage or car loan arrears.
Chapter 7 Bankruptcy: A liquidation bankruptcy where a trustee may sell the debtor's non-exempt assets to pay creditors. Most unsecured debts are discharged, and most Chapter 7 cases are completed within 3 to 6 months. Debtors must pass the means test to qualify.
Claim: A creditor's right to payment from the debtor or the debtor's property. Claims can be secured, unsecured priority, or general unsecured, and the classification determines the order and amount of payment in bankruptcy.
Collateral: Property that a debtor pledges to secure a debt, such as a house securing a mortgage or a car securing an auto loan. If the debtor defaults, the secured creditor has the right to seize and sell the collateral.
Confirmation: The court's approval of a Chapter 13 repayment plan. Once confirmed, the plan is binding on both the debtor and creditors, and the debtor must make all payments as outlined.
Conversion: Changing a bankruptcy case from one chapter to another, such as converting a Chapter 13 case to Chapter 7. Conversion may be requested by the debtor, trustee, or creditors under certain circumstances.
Cramdown: A provision in Chapter 13 that allows the debtor to reduce the balance owed on certain secured debts to the current market value of the collateral, rather than paying the full loan amount. This is available for some car loans and other secured debts, but not for a primary mortgage.
Credit Counseling: A mandatory course that must be completed within 180 days before filing bankruptcy. The course, taken from an approved provider, reviews your financial situation and explores alternatives to bankruptcy.
Creditor: A person, business, or entity to whom the debtor owes money. Creditors may be secured (holding collateral) or unsecured (holding no collateral), and they may file claims in the bankruptcy case to receive payment.
Current Monthly Income (CMI): The average of the debtor's gross monthly income over the six calendar months before filing, used to calculate the means test. It includes wages, business income, pension payments, and contributions from household members, but excludes Social Security benefits.
Debtor: The person or entity that files for bankruptcy and owes debts to creditors. Once the petition is filed, the debtor receives the protection of the automatic stay and may ultimately receive a discharge of qualifying debts.
Debtor Education: A financial management course that must be completed after filing but before receiving a discharge. The course covers budgeting, money management, and wise use of credit to help the debtor avoid future financial problems.
Discharge: A court order releasing the debtor from personal liability for qualifying debts, meaning the debtor is no longer legally obligated to pay them. Not all debts are dischargeable; exceptions include most student loans, recent taxes, child support, and alimony.
Dismissal: The termination of a bankruptcy case without a discharge, usually because of a failure to comply with court requirements, provide required documents, or make plan payments. A dismissed case can sometimes be refiled.
Disposable Income: In Chapter 13, the portion of a debtor's income that remains after subtracting reasonably necessary expenses. Disposable income determines how much must be paid to unsecured creditors through the repayment plan.
Equity: The difference between the market value of a property and the total amount owed on it. For example, a home worth $200,000 with a $150,000 mortgage has $50,000 in equity. Exemptions protect equity up to specified limits.
Exemption: A legal protection that allows debtors to keep certain property from being sold to pay creditors in bankruptcy. Depending on the state, debtors may choose between their state exemption system or the federal exemption system, but cannot mix the two.
Filing Fee: The fee charged by the bankruptcy court to file a case. As of 2024, the filing fee is $338 for Chapter 7 and $313 for Chapter 13. Debtors who cannot afford the fee may apply to pay in installments or request a fee waiver (Chapter 7 only).
Fresh Start: The fundamental purpose of bankruptcy law: giving honest debtors a new financial beginning by discharging overwhelming debts and allowing them to rebuild their financial lives free from pre-bankruptcy obligations.
Garnishment: A legal process by which a creditor can collect money directly from a debtor's wages, bank account, or other assets through a court order. Filing for bankruptcy stops most garnishments through the automatic stay.
Homestead Exemption: An exemption that protects equity in the debtor's primary residence. The amount protected varies by state. Some states offer generous homestead exemptions while others provide more limited protection. The federal homestead exemption is $31,575 (can be doubled in joint filings).
Lien: A legal claim or hold on property as security for a debt or obligation. Common types include mortgage liens, tax liens, and judgment liens. Some liens survive bankruptcy and must be dealt with separately.
Lien Avoidance: A process by which a debtor can remove certain types of liens from property in bankruptcy, particularly judicial liens and non-possessory, non-purchase-money security interests that impair exemptions.
Lien Stripping: In Chapter 13 bankruptcy, the removal of a junior mortgage lien (such as a second mortgage or HELOC) when the home's value is less than the balance owed on the first mortgage, making the junior lien wholly unsecured.
Liquidation: The process of converting assets into cash to pay creditors, which is the primary mechanism in Chapter 7 bankruptcy. The trustee identifies non-exempt assets, sells them, and distributes proceeds to creditors according to priority.
Means Test: A calculation used to determine eligibility for Chapter 7 bankruptcy based on the debtor's income and expenses. If the debtor's income is below their state's median for their household size, they pass the test automatically. If above, further calculations are required.
Meeting of Creditors (341 Meeting): A mandatory hearing held approximately 30-45 days after filing, where the trustee and any creditors may question the debtor under oath about their assets, debts, and financial situation. Despite the name, creditors rarely attend in most consumer cases.
Motion for Relief from Stay: A request by a creditor asking the court to lift the automatic stay so they can proceed with collection activities, such as foreclosure on a home where the debtor is not making payments. The court balances the creditor's interests against the debtor's need for protection.
No-Asset Case: A Chapter 7 case where the debtor has no non-exempt assets that could be sold to pay creditors. The vast majority of consumer Chapter 7 cases are no-asset cases, meaning creditors receive no distribution.
Non-Dischargeable Debt: Debts that cannot be eliminated through bankruptcy. Common non-dischargeable debts include most student loans, recent tax obligations, child support, alimony, debts from fraud or willful injury, and criminal fines or restitution.
Non-Exempt Property: Property owned by the debtor that is not protected by any bankruptcy exemption. In Chapter 7, non-exempt property may be sold by the trustee to pay creditors. In Chapter 13, the debtor must pay unsecured creditors at least the value of non-exempt property.
Objection to Discharge: A complaint filed by a creditor, trustee, or the U.S. Trustee challenging the debtor's right to receive a discharge. Grounds include fraud, concealing assets, destroying records, or failing to explain asset losses.
Payment Plan (Installments): An arrangement allowing the debtor to pay the bankruptcy filing fee in up to four installments over 120 days, rather than in a lump sum. The court must approve the installment plan, and all payments must be made before the case can proceed to discharge.
Petition: The official form filed with the bankruptcy court to initiate a bankruptcy case. The petition includes basic information about the debtor, and is accompanied by schedules listing assets, debts, income, expenses, and financial transactions.
Plan (Chapter 13): A detailed proposal submitted by the debtor in Chapter 13 outlining how debts will be repaid over a 3-to-5-year period. The plan specifies monthly payment amounts and how each class of creditor will be treated.
Preferential Transfer: A payment or transfer of property made to a creditor within 90 days before filing (or one year for insiders) that gives the creditor more than they would have received in a Chapter 7 liquidation. The trustee can recover preferential transfers to distribute the funds more equitably.
Priority Debt: Debts that are paid before general unsecured debts in bankruptcy, including domestic support obligations (child support and alimony), certain tax debts, and administrative expenses. Priority debts generally cannot be discharged and must be paid in full in Chapter 13.
Pro Se: Filing bankruptcy without an attorney, representing yourself in court. While legally permitted, pro se filing is complex and risky, as mistakes can result in loss of property, denial of discharge, or dismissal of the case.
Proof of Claim: A written document filed by a creditor with the bankruptcy court stating the amount and type of debt owed by the debtor. The claim must be filed within the deadline set by the court to be eligible for payment from the estate.
Reaffirmation Agreement: A voluntary agreement between the debtor and a creditor to continue paying a dischargeable debt after bankruptcy, usually to keep the collateral (such as a car or home). The debtor gives up the discharge protection for that specific debt in exchange for retaining the property.
Redemption: A Chapter 7 option allowing the debtor to keep secured personal property (such as a car) by paying the creditor the current market value of the property in a single lump-sum payment, regardless of the remaining balance on the loan.
Schedules: The detailed forms filed with the bankruptcy petition listing all of the debtor's assets, debts, income, expenses, and recent financial transactions. Accurate and complete schedules are essential, as intentional omissions or misstatements can result in criminal penalties.
Secured Debt: A debt backed by collateral, such as a mortgage (secured by the home) or an auto loan (secured by the vehicle). If the debtor defaults, the creditor can seize and sell the collateral. Secured debts receive preferential treatment in bankruptcy.
Statement of Financial Affairs (SOFA): A document filed with the bankruptcy petition requiring the debtor to disclose financial history, including income, property transfers, lawsuits, repossessions, and business interests over the previous two to four years.
Surrender: When a debtor gives up collateral securing a debt in bankruptcy, such as returning a car to the lender. Surrender eliminates the debtor's personal liability for the debt (which is discharged) while the creditor takes back the property.
Trustee: A person appointed by the court to administer a bankruptcy case. In Chapter 7, the trustee reviews the debtor's assets, sells non-exempt property, and distributes proceeds to creditors. In Chapter 13, the trustee collects plan payments and distributes them to creditors.
U.S. Trustee: A Department of Justice official who oversees the administration of bankruptcy cases, appoints private trustees, monitors compliance with bankruptcy laws, and may take action against fraud or abuse in the bankruptcy system.
Unsecured Debt: A debt not backed by collateral, such as credit card debt, medical bills, personal loans, and most utility bills. Unsecured debts are typically the last to be paid in bankruptcy and are most commonly discharged in Chapter 7.
Wage Garnishment: A court-ordered deduction from an employee's paycheck to satisfy a debt. Under federal law, creditors can garnish up to 25% of disposable earnings, though some states impose lower limits. Filing bankruptcy imposes an automatic stay that stops most wage garnishments immediately.
Wildcard Exemption: An exemption that can be applied to any type of property, not limited to a specific category like homestead or vehicle. Not all states offer a wildcard exemption, but the federal system provides $1,475 plus up to $13,950 of unused homestead exemption.