Here are some basic, plain-language definitions that will help your understanding of the Bankruptcy Process.
Chapter 7 Bankruptcy – Commonly referred to as “straight Bankruptcy,” in this kind of Bankruptcy the debtor does not set up a plan to pay creditors. The debts are simply eliminated (with some exceptions), and if the debtor owns anything that is not protected, it will be sold for the benefit of the creditors. In most consumer cases, everything is protected and the debtor does not lose any property.
Chapter 13 Bankruptcy – Commonly referred to as “reorganization Bankruptcy,” in this kind of Bankruptcy the debtor attempts to pay back creditors using a court-approved 3-5 year payment plan. A debtor might file Chapter 13 because it will stop a foreclosure, or because their income is too high to qualify for Chapter 7.
Credit Counseling - A simple program that consumer debtors must complete before a Bankruptcy case is filed, and then again before the case is over. This requirement can be done on the phone or internet, and it takes about an hour. Go to www.bkcert.com for details.
Credit Report – A record of your current debt, and your past borrowing and repaying habits. Credit reports also contain information about your past names and addresses, as well as some public records such as foreclosures, repossessions, judgments, and bankruptcies. The common credit reports come from Equifax, Experian, and Transunion. They use a formula to generate a credit score, which creditors use to decide whether to extend credit to you, and at what terms and at what interest rate. A Bankruptcy stays on your credit report for 10 years, however you can begin rebuilding your credit immediately after the Bankruptcy.
Debt – Money, property, or obligations that are owed to a creditor. Common debts in a Bankruptcy are credit card debts, medical bills, lines of credit, car payments, house payments, judgments, repossession and foreclosure deficiencies.
Discharge Order – The court order at the end of a Bankruptcy that eliminates all of the debtor’s dischargeable debts. This is one of the final steps in the Bankruptcy process, and it is important for the debtor to keep a copy of the discharge order to prove completion of the Bankruptcy.
Exempt Property – Property that is “protected” in the Bankruptcy. In other words, property that is protected by laws from being taken by the trustee and sold off. In most Bankruptcy cases, all of the debtor’s property turns out to be exempt.
Means Test - A complicated “test” used to determine if someone qualifies for Chapter 7 Bankruptcy. The test examines a debtors past six months of income and compares that to common living expenses as defined by the U.S. Trustee and the I.R.S. Most people pass this test, but an attorney should be consulted to know for sure.
Meeting of Creditors - Also called a “341 Meeting,” this is a mandatory meeting a debtor must go to and briefly tell the trustee why they had to file for Bankruptcy. Creditors are allowed to show up and ask the debtor questions. It is recommended you are represented by an attorney at this meeting.
Reaffirmation Agreement – An agreement signed by the debtor and creditor to waive the discharge on a certain debt, notwithstanding the Bankruptcy. In other words, you are agreeing to keep a certain debt out of the Bankruptcy. This is usually done for car or house that you want to keep, and therefore you agree to keep the debt and keep making the regular payments.
Secured Creditor – A creditor that has a security interest in collateral for the debt owed to it. For example, your automobile lender is a secured creditor because the debt you owe it is “secured” by your car. If you don’t make your payments, they have a right to take your car. Compare that to an unsecured creditor, like a credit card company. The credit card company cannot repossess any specific item because they are “unsecured,” but they can still sue you and try to collect in other ways.
Trustee – The person in your Bankruptcy who is responsible for collecting and selling any non-exempt assets, and for making sure laws and procedures are followed correctly. The trustee usually runs the Meeting of Creditors.
Unsecured Creditor – A creditor that does not have any security for the debts owed to it. For example, a credit card debt is an unsecured debt. If you don’t pay them, they cannot repossess any specific item of yours because you have not put up any collateral for their debt. However, they can still sue you and try to collect from you in other ways, such as taking money from your bank account.
Judgment - In a Bankruptcy context, a judgment is a determination by a court that a debtor owes a creditor a certain amount of money. The creditor gets the judgment after winning a lawsuit against you. The creditor will then use the judgment to “collect” against you by having the sheriff or constable levy your bank accounts and any other non-exempt property they can find. Bankruptcy will eliminate most judgments.