Bernstein’s Dictionary of Bankruptcy Terminology
Robert S. Bernstein, managing partner of Bernstein-Burkley, P.C., former President of the Commercial Law League of America, and author of Get P.A.I.D., serves as counsel to bankruptcy trustees, creditors’ committees, and creditors in bankruptcy proceedings throughout Pennsylvania, Ohio, and West Virginia. The firm counsels clients in Bankruptcy, Restructuring, Banking, Business, Collections, Mortgage Foreclosure, Insolvency, Real Estate, Administrative, Appellate, and Civil Law.
Bankruptcy is fast becoming an everyday topic of conversation. Its impact on the lives of individuals and corporations can affect them in numerous ways. Like most specialties, bankruptcy law has a language of its own. Its unfamiliar words and phrases make it difficult to comprehend. This dictionary explains the most commonly used bankruptcy terms.
HOW TO USE THIS DICTIONARY
Throughout the dictionary, words or phrases defined elsewhere, either with their own definition or in another context, are in boldface and linked to their definition. The word is linked only the first time it is used in a particular definition.
There are places where a phrase is in boldface but each word of the phrase is defined separately and linked to its own definition.
While defining some terms, we felt an example might further explain the definition. Examples are in italics.
The dictionary is set up in alphabetical order where appropriate.
This dictionary should not be relied on as legal advice. Predicting how bankruptcy may affect any given situation requires a knowledge of the facts surrounding that situation. Specific questions should be directed to a bankruptcy attorney. Dollar amounts of some statutory provisions may increase automatically from year to year. Before relying on specific amounts, be sure to check the current calculations.
Copyright 2012 — Bernstein-Burkley, P.C.
Dictionary of Bankruptcy Terminology
Please select the beginning letter of the alphabet for the term you are looking up, or browse
TERMS (click on the link to jump to the definition below)
ABSOLUTE PRIORITY RULE
ADMINISTRATIVE EXPENSE CLAIM (under Credit, Post Petition)ADVERSARY PROCEEDING
AVOIDANCE OF LIEN
CLASS OF CREDITORS
CODE (under BANKRUPTCY CODE)
COLLECTIVE BARGAINING AGREEMENT
CONFESSION OF JUDGEMENT (Cognovit Judgment)
CONSUMER PRIVACY OMBUDSMAN
CREDIT COUNSELING AGENCY
CURRENT MONTHLY INCOME
DEBTOR IN POSSESSION
DEBT RELIEF AGENCY
DISMISSALDISMISSAL WITHOUT PREJUDICE
DISMISSAL WITH PREJUDICE
DOMESTIC SUPPORT OBLIGATIONS
ELECTION OF TRUSTEE
EQUITY SECURITY HOLDER
EXECUTORY CONTRACT (under Leases and Executory Contracts)
PACER (see also CM/ECF)
PARTY(IES) IN INTEREST
PATIENT CARE OMBUDSMAN
PAYMENTSPETITION (under Order for Relief)
CHAPTER 11CHAPTER 12/13
REVOCATIONS OF CONFIRMATION
ADMINISTRATIVE EXPENSE (under Claim, Post-Petition)
FINANCING (under Credit, Post Petition)PREFERENTIAL LIEN
PREPACKAGED BANKRUPTCY (PRE-PACK)
PRIORITY CLAIM (under Claim, Priority)
PRIVITY OF CONTRACT
PROFESSIONAL PERSONS, EMPLOYMENT
PROOF OF CLAIM (under Claim, Proof of)
PROPERTY OF THE ESTATE
USE, SALE OR LEASE
SCHEDULES OF ASSETS AND LIABILITIES
SECTION 341 MEETING (under Meeting of Creditors)
STATEMENT OF FINANCIAL AFFAIRSSTATUTE
SUBORDINATION OF CLAIM (under Equitable Subordination)
TENANCY BY THE ENTRETIES
APPOINTMENT IN CHAPTER 11
AUTHORITY TO OPERATE BUSINESS
DUTIES IN CHAPTER 7
DUTIES IN CHAPTER 11
DUTIES IN CHAPTER 12/13
ELECTION IN CHAPTER 7
503(b)(9) adds a new section for administrative claims for reclaiming creditors that is limited to the value of the goods received by the debtor in the ordinary course of business within 20 days before filing.
If the debtor’s real estate is worth $100,000, but has mortgages of $110,000 against it, the trustee may “abandon” the property rather than administer it.
In a Chapter 11 Plan, the debtor-in-possession must completely satisfy the claims of a higher, dissenting class before the claimsof classes lower in priority can participate in the reorganization. Thus, a corporate debtor’s shareholders cannot receive distribution (or retain any interest) unless the Plan provides for the unsecured creditors to be paid in full if the class of unsecured creditorshas rejected the plan.
In certain circumstances, the court may choose to abstain from control of the case or of an adversary proceeding within the case.
When an existing lawsuit between the debtor and another party is being heard in another court and someone tries to bring that dispute to bankruptcy court, the bankruptcy judge may decide to “abstain” and allow it to continue in the other court.
ADEQUATE PROTECTION (also see Relief from Stay)
Relief fashioned to protect the value of a secured creditor’s lien so it does not diminish during the bankruptcy proceeding. This relief can take the form of periodic payments, interest payments, a replacement lien on other property, or any other form determined by the court to be “adequate.”
A separate lawsuit filed in the bankruptcy court which arises in or is related to the bankruptcy case. Most federal rules of civil procedure apply to that adversary proceeding.
- A request to the U.S. District Court (or the bankruptcy appellate panel if there is one in the circuit) to review a decision of the bankruptcy court.
- A request to the Circuit Court of Appeals to review a decision of the U.S. District Court (or the bankruptcy appellate panel).
- A request to the U.S. Supreme Court to review a decision of a Circuit Court of Appeals.
ASSISTED PERSON (also see Debt Relief Agency)
A person whose debts consist primarily of consumer debts and whose non-exempt assets are less than $150,000.
A post-judgment execution proceeding that enables a creditor to seize property of the debtor, whether it is real estate, bank accounts, or personal property.
Under section 362 of the code, the filing of a bankruptcy petition automatically stops most collection and enforcement actions by creditors. Certain criminal matters and matters arising after the filing are not stayed. The stay may not apply to an eviction on a pre-petition judgment for possession or on a case filed within a year after dismissal of a prior case. Creditors may be liable for damages if they violate the automatic stay.
It is the automatic stay that stops a sheriff’s sale of the debtor’s property after a bankruptcy petition is filed.
Liens may, in some circumstances, be released or avoided by the court. Generally, liens may be avoided that are (1) preferential, (2) unsupported by value after prior liens, or (3) interfering with an individual debtor’s exemptions.
AVOIDANCE POWERS (also see Avoidance of Lien)
Rights given to the trustee or the debtor in possession to recover select transfers of property made prior to the filing of the bankruptcy case. If the recovered assets are not liquid, the assets will then be sold at a public auction and the funds from the sale may be used to pay creditors.
These powers include the ability to recover property that was the subject of a fraudulent transfer or preferential transfer by the debtor prior to the filing. A lien may also be avoided to the extent it interferes with a debtor’s exemptions.
This office receives and is responsible for the management and safe keeping of the documents filed under a bankruptcy case or adversary proceeding. The clerk is responsible for keeping a docket for each case, a claims register, correct copies of court documents filed in a case, as well as an index of all cases and adversary proceedings filed. Additionally, the clerk is often responsible for noticing creditors of deadlines within a case or proceeding.
The federal bankruptcy statute called the bankruptcy code.
A unit of the United States District Court (federal court) specializing in the handling of bankruptcy cases.
Also known as the Federal Rules of Bankruptcy Procedure. These rules govern the procedures in bankruptcy and adversary cases. In addition to these rules, each court normally is governed by its own local rules that supplement the Bankruptcy Rules.
A free and clear sale of debtor’s real estate or personal property conducted by the bankruptcy court through the trustee in order to obtain proceeds for distribution to creditors of the bankruptcy estate.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – Signed into law on April 20, 2005, which generally became effective on October 17, 2005.
Cash, bank accounts or cash equivalents subject to a security interest.
The chapter of the bankruptcy code that sets forth the provisions relating to liquidation of a debtor’s assets. In a Chapter 7 filing, a trustee is appointed to collect and liquidate assets and distribute the proceeds to creditors in accordance with set priorities.
Chapter 9 is similar to Chapter 11 but is limited to municipalities and public agencies.
Chapter 11 is the reorganization chapter of the bankruptcy code in which a debtor seeks to rehabilitate and reorganize its financial structure. The goal of Chapter 11 is to propose a plan that is accepted by a vote of the creditors or is approved by the Judge despite rejection by the creditors.
CHAPTER 12 (also see Plan)
A reorganization chapter for family farmers. It was enacted after Chapter 13 and is substantially similar.
CHAPTER 13 (also see Plan)
Chapter 13 is the wage earners’ reorganization chapter. It allows a wage earner (individual debtor) to propose a plan to pay his/her creditors in full or in part. Chapter 13 differs from Chapter 11 in that a plan is proposed at the beginning of the case and establishes a repayment structure over a three to five year period of time consisting of the Debtor’s available income.
Under BAPCPA, the so-called “superpriority” discharge was all but eliminated from Chapter 13. Most of the debts that were traditionally non-dischargeable under Chapter 7 are now subject to being determined non-dischargeable in Chapter 13.
An order of court obtained by a judgment creditor charging the interest of a judgment debtor in a general or limited partnership with payment of a judgment against the debtor. This order may be obtained even if the judgment is not against the partnership entity; this order usually leads to the appointment of a receiver to collect the debtor’s share of the partnership profits and apply them toward payment of the judgment against the debtor.
A claim arising after the date of the filing of the petition, generally required to be the actual and necessary costs of preserving the estate. Usually includes claims incurred by a Chapter 11 debtor in possession to its trade creditors. May also arise for the value of goods delivered to the debtor within 20 days of debtor filing for bankruptcy.
Any claim determined to have arisen prior to the date of filing of the petition.
Claims of some employees, employee benefit plans, domestic support obligations, taxing bodies, and others may be entitled to payment prior to the claims of general unsecured creditors.
Wages owed to employees for the last pay period prior to filing the bankruptcy petition will probably be priority claims, up to $10,000.
A form used to file a claim. The form requires the creditor to enter information to describe the basis of his claim.
Where a claim is secured by a lien, the code limits that secured claim to the value of the property less any higher priority liens. Since the priority of payment of a secured claim is higher than unsecured claims, this determination can be very important to both the debtor and its creditors. The determination of secured status can occur at various times in the proceedings.
A first mortgage where the property is worth more than the balance due on the mortgage is a fully secured claim.
The amount due a supplier for goods or services on an open account is an unsecured claim (except for the value of goods delivered to debtor within 20 days of petition date).
In large cases, often a claims agent is appointed (instead of the clerk) to manage the filing and retention of proofs of claim.
Note, this will not include claims listed by the debtor on its schedules.
A group of creditors entitled to similar treatment.
Case Management/Electronic Case Filing system, which allow for the electronic submission of documents. This type of system also provides access to court documents via the Internet.
Property pledged to secure the payment of a debt.
When a borrower grants a lender a lien on the borrower’s inventory (to secure repayment of the loan), the inventory is the collateral for the loan.
An employment agreement entered into by an employer with a group of employees.
A union contract is a collective bargaining agreement.
The code directs or allows committees to appear and act on behalf of various classes of creditors. Generally, there is a committee of unsecured creditors in a Chapter 11 case. There also may be committees of equity security holders (shareholders), or retirees or any other group that the court believes should have official representation.
A written authorization by the debtor to allow the creditor or the creditor’s attorney to enter a money judgment against the debtor if the obligation in the promissory note signed by the debtor is not paid when due.
The official act of the court in approving a plan or a sale of assets. Also known as an order confirming the plan (or sale).
A person appointed by the court to protect the privacy of a consumer debtor in the event the trustee sells or leases the debtor’s property, if it contains personal information on consumers.
In bankruptcy, the converting of a case from one chapter to another.
CRAMDOWN (also see Plan)
The action by which the court may order a plan approved over the negative vote of a class of dissenting creditors.
CREDITOR’S PETITION (also see Involuntary Case)
Petition filed against a debtor by one or more creditors.
Agency approved by the office of United States Trustee to offer credit counseling to potential debtors. A certificate from an approved credit counseling agency certifying course completion is required to file individual bankruptcy.
CREDIT, POST-PETITION (also see Claim, Post-Petition)
The debtor in possession is allowed to incur unsecured debt in the ordinary course of business without prior court approval. Such debt will be considered a post-petition claim, also referred to as an administrative expense claim. To have the new credit secured or be granted a superpriority, the extension of credit must be approved by the court.
A bankruptcy filer’s total gross income averaged over the six-month period immediately preceding the bankruptcy filing. The debtor’s current monthly income is used to determine whether the individual debtor qualifies for a Chapter 7 or a Chapter 13 Bankruptcy.
DEBT RELIEF AGENCY (also see Assisted Person)
Any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration. Does not include nonprofit organizations, creditors of assisted persons, depository institutions, or authors, publishers, distributors, or sellers of works subject to copyright protection.
The imposition of personal liability on a debtor for the unpaid balance of a mortgage debt after foreclosure has failed to result in full payment of the debt amount due, or for the unpaid balance due after the repossession and resale of personal property subject to a security interest, if the repossession sale fails to result in full payment of the debt amount due.
DISCHARGE (also see Non-Dischargeable Debt)
Discharge of debts is the goal of the debtor in a bankruptcy filing. The type of discharge depends on whether the debtor is a corporation or an individual. It also depends on the particular chapter under which the discharge is granted. Unless a specific debt is determined to be non-dischargeable, all of the debtor’s debts become unenforceable. If a creditor attempts to enforce payment of a discharged debt, it violates the order of discharge.
An explanatory document that accompanies the plan and the solicitation of votes in a Chapter 11 case. No one is allowed to solicit votes for a plan without there being an approved disclosure statement. After notice to all parties, the court holds a hearing to determine if the disclosure statement contains adequate information to allow a typical creditor to make an informed decision about the plan.
An order terminating the case prior to its normal end.
Where a debtor in possession fails to cooperate with the court, the court may dismiss the case and terminate the proceedings leaving creditors free to resume collection efforts.
Case dismissed with no rights or privileges to be considered as waived or lost, such as the ability to file again.
Case(or action) dismissed, which bars the right to bring or maintain an action on the same case or action.
The list of documents and actions within a bankruptcy case or adversary proceeding that is kept by clerk of the Bankruptcy Court. The docket also generally lists the time by which responses to pleadings are required by the Court, as well as the time and place for hearings.
A debt that accrues before, on, or after the date of the order for relief in a bankruptcy case that is owed to a spouse, former spouse, child of the debtor, or government unit for alimony, maintenance, or support.
In a Chapter 7 case, the creditors have the option to elect a trustee, at the meeting of creditors, to replace the interim trustee. For such an election to occur, creditors representing at least 20% of the claims must request a vote and a majority of the creditors voting must approve the candidate. In a Chapter 11 case, if a trustee appointment has been ordered by the court, any party in interest may, within 30 days of the order, request an election to replace the trustee.
A lawsuit brought to remove a party who is occupying real property.
Typically husband and wife, a form of indivisible co-ownership of realty or personality estate that upon death of one, survivor takes title to the whole estate.
The action by which a court postpones payment to one creditor until others are paid. This is usually based upon the inequitable or wrongful conduct of the postponed creditor.
If the sole shareholder of a debtor corporation improperly dealt with the assets of the company, the repayment of that shareholder’s actual loans to the company may be equitably subordinated to all other creditors.
Generally, a shareholder or partner.
The intangible entity containing all of the non-exempt assets and liabilities of the debtor.
An examiner is an officer appointed by the bankruptcy court to review certain aspects of the operation of a Chapter 11 debtor. Aside from the investigative function, examiners have been used as mediators to assist the court in resolving disputes between and among various factions in a bankruptcy court.
In Chapter 11, for 120 days after the filing of the petition, the debtor has the exclusive right to file a plan of reorganization. The time may be extended or shortened by the court. During this period, parties who wish to file competing plans must convince the court to terminate the debtor’s exclusivity period. If a trustee is appointed, the exclusivity period is terminated.
The act of getting an officer of the court to take possession of the property of a losing party in a lawsuit, the judgment debtor, on behalf of the winner, the judgment creditor, so that it may be sold and the proceeds may be used to pay the judgment.
Property that may be kept by an individual debtor that is not used for distribution to creditors and is free from liability to satisfy a judgment. The bankruptcy code and state laws control the exemptions to which the debtor is entitled.
Examples of exemptions include: up to $18,450 in equity in a personal residence; up to $2,950 equity in an automobile; and certain personal property where the value of each item does not exceed $475 and the cumulative value does not exceed $9,850.
FEE APPLICATION (also see Trustee, Compensation)
In order for attorneys and other court-appointed professionals in bankruptcy cases to receive compensation, they must file an application or motion with the bankruptcy court detailing their activities and the amount of time spent. The court provides notice to creditors and other parties in interest and allows an opportunity for objections to be filed. No court-appointed professional may be paid without an order approving that payment.
A fraudulent transfer is a transfer of an asset for less than fair value. Fraudulent, in this situation, does not mean that a criminal fraud has occurred. It means only that the transfer has placed the asset out of the reach of the trustee or creditors. This transfer may be avoided (reversed) by the bankruptcy court.
If a debtor, prior to filing bankruptcy, were to sell a $100,000 piece of real estate to a friend for $10, the transfer would probably be a fraudulent transfer.
A legal process whereby a debt owed by a third person (garnishee) to a judgment debtor, or property of a judgment debtor held by that third person garnishee, is attached by a creditor toward satisfaction of the obligation or debt owed by the judgment debtor to the judgment creditor.
An individual or a corporation that guarantees the debt of another.
An order by a court directing that a party act or refrain from acting in a given way. Generally, injunctions are difficult to obtain and may require the posting of a bond to pay for possible damages to a party who may be wrongfully enjoined.
Person or other entity in a position to influence the debtor’s actions. Transactions between insiders and the debtor are subjected to heightened scrutiny in a bankruptcy case.
If the debtor is an individual, insiders include family members, partners and any other business owned or operated by the debtor. If the debtor is a corporation, insiders include officers, directors and those who own or control more than 20% of the voting shares.
Creditors of a debtor may petition the court to force the debtor into a bankruptcy proceeding. This may also be referred to as a creditors’ petition. If the debtor has 12 or more creditors, the petition must be filed by three or more creditors whose claims total at least $12,300. If the debtor has fewer than 12 creditors, a single creditor whose claim is at least $12,300 may petition the debtor into bankruptcy. After the filing of the petition, the debtor is given an opportunity to contest the filing. If the creditors are successful, an order for relief is entered and the case proceeds substantially like any other bankruptcy case. Creditors may choose to file an involuntary case under Chapter 7 or Chapter 11.
The revival (renewal) of a judgment. Typically, judgments that are recorded as liens against real property expire after a fixed number of years. Creditors are usually able to revive judgments for additional time periods.
A lien obtained by a judgment, levy or other legal proceeding.
These plans were traditionally put in place in bankruptcy cases as incentives to upper management to continue working for the debtor throughout the bankruptcy. KERPs have been substantially curtailed under the 2005 amendments to the bankruptcy code.
Executory contracts are contracts where obligations are yet to be performed by both parties. The bankruptcy code gives special treatment to unexpired leases and executory contracts by allowing the debtor, in many cases, to choose whether it wants to continue with the agreement (assume) or terminate the agreement (reject).
A contract to sell goods where the goods have not yet been delivered is an executory contract. A contract for the sale of goods where the goods have been delivered and the receiving party has yet to pay, is not an executory contract. Most leases of personal property or real estate are executory contracts. A collective bargaining agreement is an executory contract and is given special treatment.
A body of law which includes liability for breach of contract and other wrongs where banks and other lenders may be made to pay damages to customers.
A bank that terminates a long standing credit relationship without warning, where no default exists, may be held liable for damages.
A transaction where a purchaser uses the assets of the corporation to be acquired (target) as collateral for the loan to buy the stock of the target. LBOs stand a significant risk of bankruptcy because, after the transaction, they have little net worth to weather a business downturn. Unsecured creditors of a bankrupt LBO often argue that the lenders and former shareholders received a fraudulent transfer.
A charge against or interest in property to secure payment of a debt. A lien prevents the sale of the encumbered item without the permission of, or payment to, the lien holder.
A mortgage on real property is a lien. An encumbrance on the title of an automobile is a lien.
A pending lawsuit. Typically a notice of lis pendens is filed of record with the court in which the suit is pending, if the subject matter of the lawsuit involves a dispute as to title to certain real estate. Although the notice of the lis pendens does not create an enforceable lien, it is notice to the public that all who have or claim an interest in the affected property risk having their interest bound by an adverse judgment.
A method for projecting surplus income of a consumer Chapter 7 debtor. Under this test, if a Chapter 7 debtor’s income exceeds allowed expenses by a certain minimum amount per month, the debtor’s Chapter 7 will be dismissed, leaving Chapter 13 as his only bankruptcy alternative.
A claim, created by state law, granted to suppliers of labor and/or material to building projects, to secure priority of payment of the price of work performed or materials supplied in erecting, constructing, altering, or repairing a building or other structure; the claim encumbers the land and the building and improvements thereon.
Also known as the section 341 meeting or first meeting of creditors. This is an opportunity for the trustee and the creditors to question the debtor about its pre- and post-petition activities, assets, debts, etc. An individual debtor appears in person; a corporation is represented by an executive officer; both must answer questions under oath.
A request filed with the Court for a specific action to be taken.
A signed writing containing an unconditional promise or order, by the signer or maker of the instrument to pay a sum certain in money, either on demand or at a definite time, and it must be payable to the bearer or to order.
Examples of negotiable instruments are promissory notes and checks.
If, after consideration of exemptions and secured creditors and lien holders, there is no property that can be liquidated/distributed for the benefit of creditors, the case is said to be a “no asset” case.
Even though a debtor may have assets (real estate, automobiles, accounts receivable), if those are fully exempt or fully encumbered, the case may be a “no asset” case.
NON-DISCHARGEABLE DEBT (also see Discharge)
Certain debts are not included in the debtor’s discharge. Some are automatically excluded. Others to be excluded require action by the creditor.
Obtaining credit by fraud or a debt for alimony, maintenance or child support are types of debts that may be non-dischargeable.
Any party may object to any claim by filing an objection with the court. Similar to any lawsuit, a hearing is scheduled and the claimant must prove its claim.
ORDER FOR RELIEF (also see Petition)
The actual court order determining that a debtor is subject to the control of the bankruptcy court.
In a voluntary case, the order for relief is automatic upon the filing of the petition. In a contested involuntary case, the order for relief is entered only after the court is satisfied that the debtor should be in a bankruptcy proceeding.
PACER (see also CM/ECF)
Public Access to Court Electronic Records. These electronic records include general case information, the docket and claims register. These electronic records allow access to the records via the Internet. Some PACER systems allow access to electronic images of court documents.
An individual appointed in health care cases to ensure the safety of patients.
Distributions made to the creditors in accordance with the plan.
The document used to begin a bankruptcy case.
The Chapter 11 plan must contain, among other things, a division of the claims into various classes, a description of the treatment of each claim, a comparison of the treatment under the Chapter 11 plan to projected treatment under Chapter 7 (liquidation) and the means for carrying out the plan. Once a plan is proposed and a disclosure statement approved, the plan will be distributed to creditors for voting. The court, in each case, will set rules for the balloting process.
The plan must provide for a distribution to the debtor’s creditors of all the debtor’s projected disposable income over the term of the plan. The plan’s term is a ordinarily no more than three years. The plan must describe the treatment of all classes of creditors, the amount of the payments to be made by the trustee, and the length of time that the plan will be in effect. In return, the debtor pays into the plan the projected disposable income.
Refers to a change in the terms of a filed plan. A plan may be changed by the proponent of the plan or the reorganized debtor before or after confirmation. If the modification is sought after a plan has been confirmed, the plan, as modified, must still meet the same confirmation tests as the original plan.
Distributions made to the creditors in accordance with the plan.
Certain transfers or payments made to creditors within 90 days before the bankruptcy is filed may be reversed and recovered by the bankruptcy court. Where the creditor is an insider (relative, shareholder, etc.) the 90 days is extended to one year. The recovery of these preferential payments is a method to provide an equal distribution among creditors of the same class.
A debtor owes many creditors but pays one “friendly creditor” in full just before filing the bankruptcy petition. This payment could most likely be recovered by the trustee to be spread among all creditors.
Before filing a bankruptcy case (usually a Chapter 11) debtor and creditors negotiate an agreed upon plan. The bankruptcy petition can then be filed and the plan proposed and confirmed with much less time and expense.
The relationship between two or more parties who enter into a contract directly with each other.
All attorneys, accountants, appraisers, and other professional persons employed by a trustee or debtor in possession are required to be approved by an order of court to ensure that they are qualified and appropriate. In most situations, the professional is not entitled to payment without that payment being approved by an order of the court.
Property of the estate includes every interest that the debtor holds at the time of the filing of the petition. This includes virtually every ownership interest, including a claim that the debtor may have against another person.
Where someone holds property of the estate that should be in the control of the trustee, the court has the power to compel that person to turn the property over to the trustee for disposition.
Where the debtor’ safe deposit box holds non-exempt property of the estate, the trustee may commence an adversary proceeding to force the bank to turn over the property.
A debtor in possession or the trustee may use, sell or lease property of the estate in the ordinary course of business. What “ordinary course of business” means is different for each case and depends upon the business of the debtor. If the debtor in possession or trustee wants to deal with property other than in the ordinary course of business, it must be done with court approval, after notice to creditors and other parties in interest.
To represent oneself in a court proceeding; to be without counsel.
A bankruptcy discharge eliminates the debtor’s personal liability for dischargeable debts. There are times when an individual debtor may want to reaffirm the debt. This enables the debtor to keep property that may be subject to a lien and on which the payments may be delinquent. The creditor may agree to a delay or a modification of the payment schedule in exchange for the debtor’s reaffirming the debt. Reaffirming the debt recreates the personal liability and eliminates that particular debt from the discharge.
Since the 2005 Act, the attorney must now certify that the debtor is able to pay off the debt. In addition, before filing the reaffirmation, the debtor must complete a statement disclosing the debtor’s income, the debtor’s current monthly expenses, and the resulting balance available to pay the debt that the debtor hopes to reaffirm. If the income is insufficient to pay the reaffirmed debt, the reaffirmation is presumed to present an undue hardship on the debtor, and such presumption lasts for a period of 60 days from the debtor’s filing of the reaffirmation. The presumption of undue hardship is rebuttable.
A debtor’s attorney must certify, under penalty of sanctions, the accuracy of the debtor’s bankruptcy petition and schedules and conduct a “reasonable investigation” before making such certification. A reasonable investigation would include, but not be limited to, the attorney’s inquiring or researching matters stated in the debtor’s petition and schedules to determine the correctness of certain representations of the debtor.
A written demand made by a creditor to a debtor, upon discovery of the insolvency of the debtor, who has received goods, while insolvent, from the creditor, within 45 days prior to the debtor’s bankruptcy filing. By making a timely written demand for reclamation, a creditor protects certain remedies he may have in the debtor’s bankruptcy.
A reduction or rebate in proceeds claimed by a party arising from the same transaction with another party, as opposed to a “set off” which arises from a transaction that is collateral or somehow related to the same transaction.
A creditor may have a lien on personal property of a debtor where the value of the property is less than the amount due. In that event, the code allows a debtor to pay the creditor the value of the property, rather than the balance due and eliminates the lien from the property.
RELIEF FROM STAY (also see Adequate Protection)
Certain creditors may obtain an order terminating the automatic stay to allow them to enforce their claims, foreclose on a mortgage or enforce other liens. A debtor can offer a creditor adequate protection to prevent the creditor from obtaining relief from the automatic stay.
A bank holding a delinquent mortgage can move for relief from stay to foreclose. By offering to stay current on its payments, the debtor may prevent a relief from stay.
Where a party is in bankruptcy, removal is the act of moving a piece of litigation from another court to the bankruptcy court or the U.S. District Court.
The entity resulting from the confirmation of a Chapter 11 plan.
If a debtor files for bankruptcy protection, but has had one or more previous bankruptcies during the previous year, the automatic stay automatically expires 30 days after the most recent filing unless the debtor can prove that the debtor’s new bankruptcy was filed in good faith.
An action to recover property said or claimed to be taken from the owner unlawfully.
Every debtor is required to file lists of assets and liabilities. These lists are on prescribed forms and divide assets and liabilities into various categories.
A lien on personal property obtained by consent. Security interest is often used to describe any lien on property.
Where a creditor also owes money to a debtor, a setoff may be appropriate.
If a debtor owes a supplier $10,000, but the supplier has purchased product from the debtor and owes the debtor $15,000, the creditor has a setoff which should allow it to pay the debtor only $5,000.
A person engaged in commercial activities, with the exception of a business involving real estate, with debts not in excess of $2,000,000.
STATEMENT OF FINANCIAL AFFAIRS (also see Schedules of Assets and Liabilities)
A detailed set of questions in a prescribed form which must be filed by the debtor in each bankruptcy case.
A legislative enactment.
The bankruptcy code is a statute.
A real estate tax lien is an example of a statutory lien.
An agreement entered into between the parties, plaintiff and defendant.
The bankruptcy code gives a trustee rights to reverse (avoid) certain transactions or liens which occurred within various time periods before the petition was filed. The trustee obtains the power that a hypothetical creditor would have had, even if no such creditor actually existed.
The court may dismiss a Chapter 7 bankruptcy of an individual whose debts are primarily consumer oriented, when it believes the petition is a substantial abuse of the provisions of the code. Often the court will permit the debtor to convert to a Chapter 13 rather than face dismissal.
In considering whether the granting of relief would be an abuse of the provisions of the code, the court shall presume that abuse existed in a Chapter 7 context when the debtor’s income exceeds a minimum threshold, as defined in 11 USC 702(b) of the code. For example, if the debtor’s current monthly income exceeds allowable expenses multiplied by 60 (which is the maximum existence of a Chapter 13 plan), exceeds the lesser of (a) $10,000 or (b) the greater of 25 percent of unsecured nonpriority claims or $6,000, abuse is presumed.
An individual with $50,000 of disposable income will probably be prevented from discharging his debts.
SUPERPRIORITY (also see Credit, Post-Petition)
TENANCY BY THE ENTIRETIESA form of indivisible co-ownership, typically husband and wife, of real estate or personal property that upon death of one, survivor takes title to the whole estate. Upon divorce, the parties to the entireties estate become tenants in common, each owning a half-interest in their property.
APPOINTMENT IN CHAPTER 11 (also ass Debtor in Possession)
The code presumes a debtor will remain in possession of its property and business in a Chapter 11 case. In cases of fraud, gross mismanagement or where the appointment is in the interest of creditors, the court may appoint a trustee to take over the business of the debtor. The appointment of a trustee terminates the debtor’s exclusivity period.
AUTHORITY TO OPERATE BUSINESS
The powers granted by the code allowing the release of liens or the recovery of transferred property under certain circumstances. These powers include the ability to recover property that was the subject of a fraudulent transfer or preferential transfer by the debtor prior to the filing.
The maximum compensation allowed a trustee is based on a fixed percentage of monies disbursed to parties in interest. The court may reduce that compensation where appropriate. Where the trustee is also employed as a professional attorney or accountant in the case, the court may compensate those services separately.
DUTIES IN CHAPTER 7
The trustee’s duties include collecting and liquidating the property of the estate, investigating the financial affairs of the debtor, furnishing such information as is requested by a party in interest and making a final account and report to the court and the United States Trustee.
DUTIES IN CHAPTER 11
The Chapter 11 trustee’s duties include those in Chapter 7 as well as operation of the business of the Chapter 11 debtor.
DUTIES IN CHAPTER 12/13
The duties of the trustee in Chapters 12 and 13 include many of the duties of a Chapter 7 trustee, but also include hearings on the valuation of property, confirmation of the plan and modification of the plan after confirmation. The trustee also is to insure the debtor makes timely payments.
ELECTION IN CHAPTER 7
At the section 341 meeting of creditors, the creditors present may elect a trustee other than the interim trustee. If there is no election, the interim trustee continues as the permanent trustee.
INTERIM TRUSTEE (see Election of Trustee)
In a Chapter 7 (liquidation) case, the Office of the United States Trustee immediately appoints an interim trustee to administer the case. At the meeting of creditors, the creditors may, in certain circumstances, elect a trustee to replace the interim trustee. If no election is held, the interim trustee becomes the permanent trustee.
Proceeds to creditors who were issued checks that did not clear, which are returned to the trustee. The trustee stops payment on the checks and writes checks to the clerk of the bankruptcy court. The clerk retains proceeds for 5 years and then escheats them to the U.S. Treasury, if unclaimed.
The Office of the United States Trustee is an arm of the U.S. Department of Justice charged with administering the bankruptcy trustee program and monitoring the financial reporting in Chapter 11 cases. The U.S. Trustee has the right to appear and be heard in any bankruptcy proceeding and is often thought of as a “watchdog.” The U.S. Trustee appoints the official committee of unsecured creditors in Chapter 11 cases.
A creditor without a lien. Unsecured claims may or may not have priority.
Certain claims and wages for employees are unsecured claims. Most trade creditors are unsecured non-priority.
VOLUNTARY CASE (also see Involuntary Case)
A voluntary bankruptcy proceeding.
Although U.S. district courts have original jurisdiction over bankruptcy matters, they typically refer those matters to bankruptcy courts. Under certain circumstances, the district court must withdraw the reference (must take the case back). It also may take the case back under any circumstances it deems appropriate.