GLOSSARY
Glossary of Terms
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A Rule 2004 exam allows parties involved in a bankruptcy case to gather information from a debtor or other parties. While similar to the discovery process in civil litigation, the scope of a Rule 2004 Exam is quite broad, allowing the examining party to inquire into the acts, conduct, property, liabilities, and financial condition of the debtor, or any matter that may affect the administration of the debtor’s estate, or the debtor’s right to a discharge.
A
Adversary proceedings are legal proceedings that arise from and are related to a bankruptcy proceeding. As they are intended to resolve complex disputes stemming from the bankruptcy proceeding, adversary proceedings are addressed in the framework of the bankruptcy court. They can involve a variety of issues, such as determining the dischargeability of certain debts, objecting to the debtor’s overall discharge, recovering property transferred or hidden by the debtor, addressing the validity of liens, or handling allegations of fraud.
Initiated by filing a complaint in the bankruptcy court, adversary proceedings can be brought by the debtor, the trustee, creditors, or other parties involved in the bankruptcy. The process follows a similar structure to federal civil lawsuits, including steps like serving the complaint, responding, discovery, and potentially a trial. Presided over by a bankruptcy judge, the outcomes of these proceedings can significantly influence the administration of the bankruptcy estate, the rights of creditors, or the debtor’s discharge. Decisions made in adversary proceedings can be appealed to higher courts. This type of proceeding ensures that complex legal issues related to the bankruptcy case are resolved fairly and thoroughly.
Related Terms:
- Core Proceeding
- Non-Core Proceeding
B
C
In the context of re-organization filings (under Chapters 11 and 13), the borrower works with his creditors to develop a mutually agreeable repayment plan, specifying certain debts to be discharged and others to be repaid. If the plan meets all the necessary legal requirements, a confirmation order is entered by the trustee.
For Chapter 11 filings, the confirmation order usually signals the discharge of the agreed-upon debts. Discharge is granted even though the borrower still has outstanding debts that he must continue to repay over time according to the plan.
For Chapter 13 filings, however, no debts will be discharged until the borrower has successfully completed the repayment plan.
Consumer debt is debt incurred by an individual primarily for daily living, personal or family needs. This includes things like credit card debts for household purchases, car loans for personal vehicles, and mortgages for primary residences. This type of debt contrasts with debts incurred for business or investment purposes (non-consumer debts).
The distinction between consumer and non-consumer debt is particularly important in the context of Chapter 7. Borrowers who carry greater consumer debt to relative to non-consumer debt are eligible for Chapter 7 protection only if they satisfy the Means test. On the other hand, borrowers who carry more non-consumer debt relative to consumer debt are not subject to the Means Test and may automatically file under Chapter 7.
Why this distinction? The Means Test was adopted as part of BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). This creditor-friendly legislation was enacted in response to perceived abuse of the bankruptcy system by individual debtors who sought to “escape” the debts they had amassed as result of “irresponsible spending.” By imposing qualification requirements such as the Means Test on borrowers carrying greater consumer debts relative to non-consumer debts, BAPCPA subjects consumer debtors to greater scrutiny with the goal of spotting potential abuse of the bankruptcy system.
Related Terms:
- Non-Consumer Debt
E
A bankruptcy estate is a legal entity created when an individual or business files for bankruptcy under. The estate essentially comprises all the assets and property interests of the borrower at the time of the bankruptcy filing, and in some cases, it can include property acquired by the debtor during the bankruptcy process. The concept of a bankruptcy estate is crucial as it determines what resources are available to pay creditors.
Related Terms:
An executory contract is a contract under which both parties still have significant performance obligations.
Related Terms:
- Assume (as in Contract, Debt)
- Reaffirm (as in Contract, Debt)
- Reject (as in Contract, Debt)
Most relevant in the context of Chapter 7 filings, exempt assets are property or possessions that are protected by exemption statutes and cannot be seized or sold off (liquidated) by the bankruptcy trustee to pay off creditors. The assets protected by these exemptions are considered to be crucial for allowing individuals to retain a basic level of property and income to support themselves and start anew after bankruptcy.
While the nature and extent of these exemptions from state to state, some common examples include the following:
- Homestead Exemption:
- This protects equity in your primary residence up to a certain amount. The specific limit varies widely by state, with some states offering unlimited homestead exemptions and others offering very modest protection.
- Personal Property:
- Items such as clothing, furniture, appliances, and other household goods are often exempt, up to a certain value. Each state has its own list of what personal property is exempt and the value limit.
- Motor Vehicle:
- A certain amount of equity in a car or other vehicle is typically exempt. This amount varies by state and is generally enough to protect a low- to moderate-value vehicle.
- Retirement Accounts:
- Most states protect 401(k)s, IRAs, and other retirement accounts in full. However, there might be caps on the exemption amount for certain types of accounts.
- Tools of the Trade:
- Professionals can often exempt the tools and equipment necessary for their trade or profession, within certain value limits.
- Public Benefits:
- Social security benefits, unemployment compensation, veterans’ benefits, disability income, and public assistance are typically exempt.
- Alimony and Child Support:
- Amounts reasonably necessary for the support of the debtor and any dependents are usually exempt.
- Life Insurance:
- Some or all of the cash value or proceeds of life insurance policies may be exempt, depending on the state law.
- Wildcard Exemptions:
- Some states have a “wildcard” exemption that can be applied to any property. This is particularly useful if the debtor has an asset that doesn’t fit neatly into other exemption categories.
- Certain Types of Personal Injury Awards:
- Compensation for personal injury, including pain and suffering or compensation for loss of future earnings, may be exempt up to a certain amount
F
G
H
I
An involuntary lien is a legal claim placed on property without the property owner’s consent—typically as a result of a legal action or judgment. Involuntary liens are imposed by law to satisfy debts or obligations owed by the property owner, often in cases of non-payment or legal disputes.
Related Terms:
- Lien
- Voluntary Lien
J
K
L
A lien is a legal claim or encumbrance placed on someone’s property to secure a debt or satisfy a legal obligation. Put differently, a lien is the mechanism that enforces the lender’s rights to the property securing a debt.
Related Terms:
- Involuntary Lien
- Voluntary Lien
M
The Means Test is used to determine an individual borrower’s eligibility to seek relief under Chapter 7. Because Chapter 7 relief allows borrowers to wipe out virtually all of their unsecured debts, only borrowers who legitimately lack the means to repay their debts are eligible to file under Chapter 7.
- Step one of the Means Test looks at a borrower’s income. If her individual income is below the median income for the state in which she is filing, she should be eligible to file under Chapter 7.
- Step two is required only for borrowers who are unable to satisfy step one of the Means Test. Step two considers a borrower’s disposable income (her income less the allowed expenses for essentials, such as food, rent, transportation, medical care, etc.). If her disposable income is not sufficient to fund a Chapter 13 repayment plan, then she may proceed to file under Chapter 7 despite the fact that her income exceeds the state’s median income level. If, however, the borrower’s disposable income is sufficient to fund a Chapter 13 repayment plan, she may not use Chapter 7 to discharge her debts entirely. Instead, she would be required to seek a partial discharge subject to completion of a repayment plan under Chapter 13.
Exception to Means-Based Ineligibility: If more than 50% of a borrower’s debts are non-consumer debts, she is automatically eligible to file under Chapter 7 bankruptcy without doing the Means Test. This exception is particularly helpful to a small business owner who has personally guaranteed loans for his business.
Why this distinction? The Means Test was adopted as part of BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). This creditor-friendly legislation was enacted in response to perceived abuse of the bankruptcy system by individual debtors who sought to “escape” the debts they had amassed as result of “irresponsible spending.” By imposing qualification requirements such as the Means Test on borrowers carrying greater consumer debts relative to non-consumer debts, BAPCPA subjects consumer debtors to greater scrutiny with the goal of spotting potential abuse of the bankruptcy system.
N
Non-consumer debts are those incurred for business or investment purposes. Examples include debts incurred in the course of operating a business (business debt); debt incurred to buy investment property or stocks (investment debt); and tax obligations (tax debt). This type of debt contrasts with debts incurred for daily living, personal, family, or household needs (consumer debts).
The distinction between consumer and non-consumer debt is particularly important in the context of Chapter 7. Borrowers who carry greater consumer debt to relative to non-consumer debt are eligible for Chapter 7 protection only if they satisfy the Means test. On the other hand, borrowers who carry more non-consumer debt relative to consumer debt are not subject to the Means Test and may automatically file under Chapter 7.
Why this distinction? The Means Test was adopted as part of BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). This creditor-friendly legislation was enacted in response to perceived abuse of the bankruptcy system by individual debtors who sought to “escape” the debts they had amassed as result of “irresponsible spending.” By imposing qualification requirements such as the Means Test on borrowers carrying greater consumer debts relative to non-consumer debts, BAPCPA subjects consumer debtors to greater scrutiny with the goal of spotting potential abuse of the bankruptcy system.
Related Terms:
- Consumer Debt
- Means Test
Related Terms:
- Dischargeable/Dischargeability
Most relevant in the context of Chapter 7 filings, non-exempt assets are property or possessions that are not protected by exemption statutes and therefore can be seized or sold off (liquidated) by the bankruptcy trustee to repay creditors. Whereas exempt assets include property considered crucial to an individual’s ability to maintain a basic level of livelihood and support himself while he starts anew after bankruptcy, the term non-exempt assets describes non-essentials such as a second property other than a primary residence, additional vehicles, investment instruments, jewelry, art, and the like.
Related Terms:
- Exempt Asset
Q
R
Most often seen in the context of Chapter 7 liquidation filings…
Similar to ‘Assuming’ an obligation in that both terms involve keeping the obligation out of the bankruptcy discharge
To reaffirm a debt refers to the borrower’s voluntarily agreeing to continue paying a debt that could otherwise be discharged after the bankruptcy process is over, even after other debts are discharged.
To reaffirm a debt refers to the borrower’s voluntarily agreeing to continue paying a debt that could otherwise be discharged in the bankruptcy process. By reaffirming the debt, the borrower can typically retain the asset (like a house or car) that is secured by the loan. If she does not reaffirm the debt, the creditor might otherwise have the right to repossess or foreclose on the asset. Reaffirmation is subject to approval by the Bankruptcy Court, which will balance the borrower’s ability to continue making payments according to the terms of the contract with her overall financial interests.
It is important to note that once a debt is reaffirmed, it will not be discharged in the bankruptcy process. In other words, the borrower will remain personally liable for the debt even after other debts have been discharged. Nonetheless, strategic reaffirmation of certain assets can be essential in helping a borrower seeking a fresh start to regain her financial footing.
Real World Example:
John, an electrician in a suburban area with limited public transportation, filed for Chapter 7 bankruptcy due to significant credit card and medical debts. He owns a car, essential for his job, with a remaining loan of $10,000. To keep his vehicle and maintain his employment, John chooses to reaffirm the car loan during his bankruptcy process. This decision allows him to retain the car, manage his work travel needs, and potentially aid in rebuilding his credit, despite his other debts being discharged. His choice is driven by the car’s crucial role in his job and the affordability of the loan payments post-bankruptcy.
Related Terms:
- Redeem (as in Contract, Debt)
- Reject (as in Contract, Debt)
To reject a contract or debt refers to the decision by a borrower to forgo fulfilling the obligations of a contract or loan agreement. The rejection of contracts is most relevant in the context of re-organization filings under Chapter 11 or 13, especially in relation to executory contracts or unexpired leases.
The decision to reject a contract is usually based on the assessment that continuing to honor the agreement is not beneficial to the borrower’s reorganization efforts, but the ability to reject unprofitable or burdensome contracts is a strategic tool that can help a business debtor streamline operations and reduce expenses, facilitating a more effective reorganization.
Rejection is subject to approval by the Bankruptcy Court, which considers how rejecting the contract affects the interests of the borrower as well as the bankruptcy estate. Once the court approves the rejection, the borrower is relieved from his future obligations under the contract or lease. This means that he no longer needs to perform any future actions or make any future payments as required by the contract. The counterparty to the rejected contract becomes an unsecured creditor in the bankruptcy case. While they may file a claim for damages resulting from the rejection, their status as an unsecured creditor significantly lowers their creditor status, making them unlikely to recover any outstanding debts through the bankruptcy process.
Related Terms:
- Estate (Bankruptcy Estate)
- Trustee
- Executory Contract
S
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Secured debts are loans or credit arrangements that are backed by collateral or assets. The mechanism enforcing the lender’s rights to that collateral is called a lien. If the borrower fails to make payments as agreed, the lien gives a lender the right to take possession of the collateral as a means to recover the debt. Common examples of secured debts include mortgage loans (where the home serves as collateral and is subject to foreclosure upon default) and auto loans (where the vehicle serves as collateral and is subject to repossession upon default).
Related Terms:
- Lien
- Unsecured Debt
T
U
Unsecured debts are loans or credit arrangements that are not backed by collateral or assets. These debts are extended to borrowers based on their creditworthiness and promise to repay the debt. Common examples of unsecured debts include credit card debts, personal loans, utility bills, and medical bills.
Related Terms:
- Lien
- Secured Debt
V
A voluntary lien is a legal claim placed on property that the property owner willingly accepts and agrees to in order to secure a debt or obtain financing; it is created through a voluntary agreement or contract between the property owner and a creditor—must commonly a written or oral contract.
Related Terms:
- Lien
- Involuntary Lien