Bankruptcy Glossary of Terms
Before you speak with a bankruptcy lawyer, you may want to familiarize yourself with some of the most common terms used during a typical bankruptcy case. At Bankruptcy Central, we provide you with the information you can use to begin making important decisions about your finances.
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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Abusive Overdraft Loan: loan made by banks, often automatically, to customers who overdraw their accounts. Usually short-term, high-interest loans for small dollar amounts. These have been estimated to cost consumers billions of dollars each year.
Adjustable Rate Mortgage (ARM): a home loan (mortgage) with payments that fluctuate ("adjust") from month to month. Compare to the more traditional "fixed rate mortgage," which comes with regular payments over the life of a loan (typically 30 years).
Asset: any piece of property with value owned by an individual or organization. In Chapter 7 bankruptcy, some assets are exempt and may be sold by a your trustee to raise money to pay creditors, but this is a rare event for most people.
Automatic Stay: one of bankruptcy's legal provisions that protects bankruptcy filers from most collection actions. The automatic stay generally takes effect as soon as a bankruptcy petition is filed and was designed to prevent lawsuits, repossession, foreclosure and wage garnishment.
Bankruptcy: an individual's legal announcement that he or she cannot repay creditors. The U.S. Bankruptcy Code offers individuals two types of personal bankruptcy protection: Chapter 7 and Chapter 13.
Bankruptcy Petition: the paperwork that a bankruptcy attorney must file with the court in order to officially start a bankruptcy case. After the filing of the petition, Chapter 7 and Chapter 13 cases proceed differently.
Bankruptcy Trustee: supervisor of a bankruptcy case. This individual is designated by the U.S. Justice Department or by the creditors in a bankruptcy case. Trustees in Chapter 13 cases are responsible for distributing filers' monthly payments among creditors; in Chapter 7 cases, they're in charge of collecting and occasionally selling non-exempt assets and distributing profits among creditors.
BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act): the "new" bankruptcy law. Passed in October 2005, BAPCPA introduced the pre-filing credit counseling briefing, the pre-discharge debtor education (financial management) course, the qualifying Chapter 7 means test and more. Learn more from the government's site about BAPCPA.
Chapter 7 Bankruptcy: also known as liquidation bankruptcy, this type of personal bankruptcy allows filers to have most of their unsecured debts discharged (forgiven) by the court. Unsecured debts include credit card bills, medical bills and payday and utility bills. The trustee in a Chapter 7 case may raise money to pay creditors by liquidating (often by selling) a filer's non-exempt assets, although this is usually a rare occurrence.
Chapter 13 Bankruptcy: also known as a reorganization of debts, this type of personal bankruptcy allows filers to catch up on past-due debts by working within a repayment plan for three to five years. Those who file under Chapter 13 are usually able to keep their home (stop foreclosure) and keep their car (stop repossession) during and after their case.
Checkbook Loan: another name for "payday loans" introduced in Illinois. This rebranding is usually part of an effort to avoid regulations on payday lenders. See payday loan.
Collateral: property used as loan security. In an auto loan, for example, the car is collateral: if the borrower fails to make payments as agreed, he will lose the car. Collateral acts as an incentive for debtors to keep up on payments.
Cosigner: literally, a person who signs his or her name on a loan along with someone else. Getting someone to cosign a loan can be a practical way of qualifying for better loan terms, but your cosigner is legally responsible to repay that loan if you cannot. In Chapter 13 bankruptcy, however, cosigners are usually protected.
Credit Counseling Briefing: a session that informs potential bankruptcy filers about their debt-management options besides bankruptcy, this briefing must be completed before the court will accept a bankruptcy petition. For information on how to complete your credit counseling briefing online or over the phone, visit Start Fresh Today.
Credit Report: a comprehensive record of your history as a borrower. This report includes information on a variety of accounts, including credit cards, mortgages, bank accounts, car loans, etc. By checking your credit report regularly (which you can do for free at annualcreditreport.com), you can help make sure no one is using your personal information but you.
Credit Reporting Agency (Credit Bureau): a company that gathers, monitors and reports consumer credit data. The three major CRAs in the United States are Equifax, Experian and TransUnion.
Credit Score: a number that measures your risk to lenders. It falls between 300 and 850, and is determined using a formula invented by the Fair Isaac Corporation. In most cases, lenders will check your credit score before agreeing to lend you money. Those with higher credit scores generally qualify for more attractive loan terms (i.e. lower interest rates) than those with lower credit scores.
Creditor: a person or entity owed money (by a debtor).
Debtor: someone who owes money (to a creditor).
Debtor Education: also known as the financial management course, this course must be completed in order to receive a discharge from the bankruptcy court. The course helps filers develop money management, budgeting and debt-reduction skills for post-bankruptcy life. For details on how to complete your debtor education course online or over the phone, visit Start Fresh Today.
Default: failure to meet financial obligations. After missing a given number of payments on a loan, a borrower defaults on that loan. The loan itself is said to be in default.
Discharge: 1. The forgiveness of debt, as in Chapter 7 bankruptcy, when the court can discharge a filer's unsecured obligations. 2. The exit from bankruptcy. Once a filer has completed all of his or her obligations to the bankruptcy court, he or she is excused ("discharged") from bankruptcy.
Dischargeable: legally able to be excused, as debts. In Chapter 7 bankruptcy cases, medical and credit card obligations are examples of dischargeable debt.
Equity: the value of an asset besides what is owed on it (such as liens, mortgages, etc.). If you can sell an item for more than it would cost you to pay off whatever you owe on it, you have equity in that item.
Exemptions: pieces of property the court cannot sell to raise money (liquidate) to pay the creditors in a Chapter 7 case. Exemptions vary from state to state, so be sure to ask your bankruptcy lawyer about the exemption laws where you live.
FICO Score: The Fair Isaac Corporation's calculation of your credit score. This is the number most commonly used by lenders, and ranges from 300 to 850. See "credit score."
Financial Management Course: see debtor education course.
Fixed Rate Mortgage: a home loan that requires lenders to make regular, unchanging monthly payments over the course of the loan, which is usually about 30 years. This is the more traditional type of mortgage. Compare with adjustable rate mortgage.
Foreclosure (Mortgage Foreclosure): the repossession of a house. When a homeowner fails to comply with the terms of the mortgage agreement (often by defaulting on payments), the bank or lender can foreclose on the house by reclaiming possession of it. Many people file Chapter 13 bankruptcy to stop foreclosure.
Garnishment: the withholding of a debtor's money or property in lieu of a debt owed. When wages are garnished, the court can order an employer to pay part of an employee's salary directly to a creditor.
Identity Theft: an information crime in which the criminal uses the victim's identification information (Social Security Number, credit card number, bank account information, etc.) to make transactions, apply for benefits, open accounts, etc. Regular checks of your credit report can help you monitor and prevent identity theft.
Insolvency: see bankruptcy.
Lien: a creditor's claim on property in exchange for a debt. A home mortgage is a voluntary lien (the borrower agrees to forfeit the house if he or she cannot make payments). A judge can put an involuntary lien on other property if a borrower falls behind on other types of debts.
Liquidation: conversion to cash (the selling) of an asset. Sometimes used to refer to Chapter 7 bankruptcy, since trustees can liquidate a filer's non-exempt assets to raise money to pay creditors.
Mass Layoffs: large-scale letting go of workers from a single company or organization. Mass layoffs usually happen because of financial struggles or reorganization.
Means Test: the test you must "pass" to qualify for Chapter 7 bankruptcy. Introduced by BAPCPA, the test relies on median income comparisons and disposable income calculations.
Medical Bankruptcy: insolvency caused by debts from medical expenses. Some studies have found that medical costs are the second most common causal factor in American bankruptcy filings.
Mortgage: a loan secured by real estate (land/home). Mortgages are useful for major purchases like homes because few people can afford to pay cash. Those who enter mortgage agreements agree to make payments on the loan as agreed or surrender the property (house).
Non-Dischargeable: not excusable by the court. Most tax debt, student loans, alimony and child support are non-dischargeable in Chapter 7 bankruptcy cases.
Non-Revolving Credit: credit that cannot be drawn on once payments have been made on the initial loan (e.g. student loans). Sometimes called closed account credit. Compare to revolving credit.
Payday Loan: short-term, small-dollar amount, high-interest loans offered by non-traditional lending sources (that is, not banks or credit unions). Payday lenders are often the only source of loans for those with weak credit scores, but because of their exorbitant interest rates, can lead to vicious debt levels.
Predatory Lending: no official (legal) definition exists for predatory lending, but the term generally refers to lending strategies that lead borrowers into more expensive loans than they qualify for. Lying about the terms of a loan and targeting specific groups with expensive loans are two common examples.
Repossession: creditor's reclamation of an asset or property when a debtor fails to make timely payments. Foreclosure is the repossession of a house.
Revolving Credit: a credit line with flexible monthly payments and spending limits, usually involving service charges. Credit cards are the most commonly recognized example of revolving credit for most consumers.
Schedules: in bankruptcy cases, the paperwork containing details about your debts, income, assets and expenses. A bankruptcy lawyer will file your schedules with the court after the initial petition has been submitted.
Secured Debt: financial obligation (debt) backed by material goods (collateral). Auto loans are backed by cars, mortgages are backed by houses, etc. Securitizing a debt reduces risk to lenders – if the borrower doesn't make payments, the creditor can seize the property. See unsecured debt.
Subprime Loan: a loan offered to someone with limited or weak credit (as determined by credit score). These loans tend have higher interest rates than prime loans because subprime borrowers are considered a greater risk to lenders.
Unsecured Debt: an obligation to pay (debt) not backed by material goods (collateral). Credit card debt, student loans and medical debt are all unsecured.
United States Bankruptcy Code: the bankruptcy laws, statutes and regulations that define the operations of bankruptcy courts in the United States. View the complete U.S. Bankruptcy Code.