Chapter 7 bankruptcy

How long your Chapter 7 bankruptcy will take depends upon whether you have assets to distribute. Most Chapter 7 cases are completed quite quickly. But if you have unexempt assets, your Chapter 7 case could have a more extended timeline. Asset cases take longer. If the trustee must liquidate assets and distribute proceeds to creditors, that takes time. Your attorney should advise you before you even file whether you have an asset or no-asset case.

If all of your property is fully protected by exemption, then you will have a no-asset case. No asset cases take three months, start to finish, from filing to discharge. Other types of actions, like adversary proceedings, can delay the closure of a Chapter 7. But the vast majority of Chapter 7 bankruptcies close about 90 days after filing.

Chapter 13 bankruptcy

Chapter 13 bankruptcy allows you to propose a repayment plan that lasts from three to five years. Your household income and type of debt determine whether you have a three-year (36 months) or five-year (60 months) repayment plan. If you want to make up missed payments on a secured debt, like a home mortgage, then usually you will want to file a five-year plan.

And at the end of your plan, all remaining balances on your debts will be discharged. Chapter 13 bankruptcy is available to almost every consumer debtor, but you must have steady monthly income to qualify.

Chapter 11 bankruptcy

Individual debtors may also use Chapter 11 of the bankruptcy code. Typically, Chapter 11 bankruptcy is reserved for high earners or those with multiple real estate or business assets. If you are able to “pre-package” your case, then the process may be over in a matter of weeks. Other Chapter 11 reorganization plans last two years, five years, or even longer. Chapter 11 offers flexibility but comes with costs, too. Most consumer debtors are better served by Chapter 7 or Chapter 13.

How long does bankruptcy take?

Chapter 7 usually takes three months, start to finish. Chapter 13 takes between three and five years. And Chapter 11 can be over very quickly or take more than five years.

If timing is a concern for you, be sure to ask your attorney about your expected timeline before you even file. Note that for most credit reporting, the date of the bankruptcy filing (and not the discharge date or date of case closure) is the most important date in your case.

Your financial freedom of choice may be limited while you remain in an active bankruptcy. If you have concerns about how long your bankruptcy will take, discuss them with your attorney from the outset so he can plan your case appropriately.

An income tax refund received after a bankruptcy is filed is subject to turnover. Doan v. Hudgins, 672 F.2d 831, 833 (11th Cir. 1982). The trustee will seek to seize your tax refund and distribute the proceeds to your creditors. You must proactively protect your tax refund in bankruptcy.

Chapter 7 vs. Chapter 13

Tax refunds as assets in Chapter 7 are always subject to liquidation. But cases filed later in the year, or right before tax season, see more tax refund turnovers. Again, if you can exempt your tax refund, then the trustee will have no interest in liquidating it for distribution to creditors.

In Chapter 13, however, if you propose a 100 percent repayment plan, then your tax refunds are yours to keep. Chapter 13 percentage plan cases often result in tax refund turnover to the trustee. You will want to discuss with your attorney how best to adjust your withholdings to minimize the amount of tax overpayment you make each year.

How to protect your tax refund in bankruptcy

The exemption laws applicable to your jurisdiction determine how much of your tax refund you can protect. Virginia and Maryland bankruptcy filers must use the state exemptions. Washington, D.C. filers may use either the state or federal exemptions.

Many people rely on their tax refunds to tune up their cars, fix the roof, pay tuition, shore up emergency savings, or even to take a badly-needed vacation. If you want to protect your tax refund in bankruptcy, let your attorney advise you how best to do so.

Bankruptcy exemptions

Your home state’s bankruptcy exemptions determine how much of your property you can protect. Bankruptcy exemptions allow you to keep sum-certain dollar amounts of assets in bankruptcy. In most cases, you can fully protect the following assets:

• Motor vehicles
• Household goods, furnishings, and clothing
• Most retirement accounts, pensions, 401(k)s, and profit-sharing plans
• Social Security payments

In Washington, D.C., you can also protect all of the equity in your primary residence. But the Virginia and Maryland homestead laws allow much lower levels of home equity protection.

The Chapter 7 trustee may also allow you to negotiate the buy-back of your nonexempt property. Your bankruptcy attorney will apprise you of your options if this is possible.

Bankruptcy planning and asset protection

You may also be able to use several asset conversion strategies to avail yourself of the full statutory exemptions. Certain amounts of nonexempt liquid assets may be used to:

• Purchase a car, household goods, clothes, or other necessities
• Make contributions to your exempt retirement accounts
• Pay down your mortgage
• Take out a life insurance policy
• Pay off nondischargeable debts, like taxes, student loans, or delinquent child support

Advanced bankruptcy planning

Asset protection trusts, equity reduction, and accounts-receivable financing are just a few of several less common techniques for protecting assets in bankruptcy.

Asset protection trusts. Several states now offer asset protection trusts, and you need not be a resident to have one. An independent trustee must run the trust and control all distributions. And the trust must contain irrevocability and spendthrift clauses.

Equity reduction. You may be able to reduce the equity in an asset (usually real property) by financially encumbering the asset. The encumbrance must be taken for a justifiable, legitimate purpose. And the encumbrance itself can be voided if taken out within one year of filing bankruptcy.

Accounts-receivable financing. If you are a business owner, you may be able to borrow against the business’s accounts receivables. If accomplished correctly, encumbering the future value of the business may make the liquidation of your business unattractive to your Chapter 7 trustee.

Avoiding fraudulent transfers

If you have nonexempt assets, you should use bankruptcy planning to legally protect your assets from creditors. You should not, however, attempt to transfer assets after you have filed bankruptcy. In many cases, the Chapter 7 trustee can attempt to void transfers made within a year of your filing bankruptcy. Starting your pre-bankruptcy planning earlier rather than later can often protect otherwise liquid assets.

A “fraudulent transfer” is the conveyance of an asset within certain statutory periods prior to a bankruptcy filing. And any transfers or gifts of assets prior to a bankruptcy filing will be closely scrutinized by the Chapter 7 trustee. The Bankruptcy Code gives the trustee the power not only to avoid the transfer, but to move for the denial of discharge to a debtor who attempts to defraud creditors through sham transfers.

Protecting assets in bankruptcy: Talk to an attorney

If you are considering filing bankruptcy and have considerable assets to protect, talk to an attorney. Do not attempt to hide or conceal or transfer or sell your assets prior to discussing your intentions with a bankruptcy lawyer. Chapter 7 trustees will ruthlessly enforce all exemption, transfer, and scratch-back laws. Be sure to obtain advice before you make any big financial moves.

If You Can Afford to Pay Your Debt

Chapter 7 Bankruptcy. Your credit will show a Chapter 7 filing for ten (10) years. If you make enough money to afford repaying your debts, then you should do that. You may forego some money in the short-term, but avoiding bankruptcy when you can afford to repay may pay off for you big time in the long-term.

Chapter 13 Bankruptcy. If you can afford to repay your debt, but not in less than five years, then consider a Chapter 13 bankruptcy. Your attorney will propose a repayment plan suitable to your budget. And a Chapter 13 bankruptcy will remain on your credit report for only seven (7) years.

If You Are Uncollectible

You may make very little income or have no income at all. Social Security may be your only source of income. Your credit score may already be very low. If you have only enough money to pay for your most basic expenses, as well as those of your dependents, then you may be an “uncollectible” debtor.

If a creditor deems you to be uncollectible, then bankruptcy might not be the best choice for you. Questions of whether or not a person should file bankruptcy due to uncollectible status usually occur near end of life.

If You Have Mostly Student Loan Debt

Chapter 7 bankruptcy eliminates student loan debt only in the rarest of circumstances. If you decide to file a Chapter 7, it will not be to discharge your student loans. Chapter 7 won’t help you at all. Student loans are nondischargeable.

Still, Chapter 13 bankruptcy may help if your student loan payments exceed your living expenses. You can use Chapter 13 to reduce or delay altogether your monthly student loan payments obligations during the term of your Chapter 13 plan. Any balances remaining on your loans after the Chapter 13 bankruptcy is over, however, must be repaid.

If You Cannot Exempt All of Your Assets

Most people do not have to worry about unexempt assets. Most Chapter 7 bankruptcy debtors have “no-asset, no-distribution” cases. Even if you own some valuable property, in many cases it will not be financially feasible to liquidate it. The amount of your debt in relation to the value of your assets is a helpful but not entirely reliable indicator.

If you own many valuable assets, however, like real estate or cars or financial instruments of any type, then you must carefully weigh whether bankruptcy is the right choice for you. Likewise, if you are expecting an inheritance or have a valuable legal claim, disclose these assets to your bankruptcy lawyer right from the outset. Your bankruptcy lawyer will analyze how they fit into your larger financial picture.

When You Should NOT File for Bankruptcy

Bankruptcy might not help with child support. In some case, bankruptcy doesn’t help with eviction. Bankruptcy is not one-size-fits-all, and bankruptcy doesn’t fix every problem. A good bankruptcy lawyer will tell you when you should file for bankruptcy. But a great bankruptcy lawyer will tell you when you should NOT file for bankruptcy.

List your assets in Schedule A/B. Be sure to include all real property, vehicles, inventory, home furnishings, clothing, jewelry, and all other tangible things that you own. Beyond personal and real property, be sure also to list all financial assets in either or both Schedule A/B and Statement of Financial Affairs.

Everyone has an alarm clock, and everyone has an umbrella. Everyone eats off plates with forks. Appropriately scheduling property of inconsequential value serves an important function in the administration of your case.

But if you fail to disclose an asset of considerable value, no matter how uncommon, you may be denied a discharge. Take care to disclose all of your assets to your attorney before your case is filed to ensure that you list everything you own.

7 Most Common Uncommon Bankruptcy Assets

Corporate Interests. If you have a legal interest in any business, you must list it in your schedules, even if you have no day-to-day connection with the business.

Cash-value life insurance policies. Most insurance policies are “term” policies and you cannot borrow against them. But if you have the ability to cash out your life insurance policy, so does the bankruptcy court. List it as an asset.

Pets. Pets are common, but did you know you must list them as an asset? The government doesn’t want your dog unless it is a pedigreed breeding animal and a possible source of income. Yet you must still list your pet on Schedule A/B. That’s OK, though, because this allows you to list your pet expenses in your Schedule J.

Timeshares. Actually, timeshares are common assets, and many people own them. Bankruptcy filers sometimes forget to list timeshares, however, because they are often literally valueless. Still, you must list both the debt and the asset. In some cases, your attorney may be able to dispose of the timeshare through a deed back to the company.

Inheritances. If you are expecting to inherit money within the next year, you should carefully weigh with an attorney your decision to declare bankruptcy. You may be able to save money by settling with your creditors outside of the bankruptcy process.

Lawsuits. If you have a potential legal claim against any person or entity, you must list that claim as an unliquidated asset.

Transfers. If you transferred or sold any asset within the last year, then you must disclose the transfer in your Statement of Financial Affairs. This includes not only outright transfers but mortgages as well. In addition, you must list any financial instruments to which you held an interest within the last year and that you closed, sold, moved, or transferred.

Assets Can Be Exempted in Bankruptcy

Even uncommon bankruptcy assets may be exempt, or shielded from liquidation, under federal or state exemption laws. Consult with a qualified attorney on which bankruptcy exemptions are best suited to protect your specific belongings and assets.

Don’t try to hide assets. Be honest with your attorney about what property you possess and you will achieve better results in your bankruptcy case.

Only one in four companies is still around 15 years after opening day. Entrepreneurs who fail often learn invaluable lessons that allow them to create better ventures. Academics have studied the effects of more and less forgiving bankruptcy laws on entrepreneurship.

In two studies cited below, the authors agree that more relaxed bankruptcy laws promote entrepreneurship. But they disagree on what level of protection should be provided.

How Bankruptcy Promotes Entrepreneurship

In Bankruptcy Law and Entrepreneurship (2008), authors John Armour and Douglas Cumming asses multiple bankruptcy variables, including exemptions, disabilities, and reorganization options, and find a strong correlation between bankruptcy protection levels and rates of self-employment. The authors use data from 15 countries from Europe and North America over 16 years.

Specifically, they find that jurisdictions with strong homestead exemptions have higher levels of entrepreneurship. This is intuitive. If a person isn’t afraid of losing her home in the event that her new business fails, she will be more likely to brave the trials and tribulations of entrepreneurship. In fact, the probability of owning a business increases a full 35% from jurisdictions with the weakest homestead exemptions to those with the strongest. A relatively predictable path to bankruptcy discharge, too, has a positive effect on entrepreneurship.

Armour and Cumming conclude that “more lenient bankruptcy law will, at the margin, stimulate entry by persons with lower levels of optimism to become entrepreneurs.” Moreover, they find, “a more lenient bankruptcy law will permit failed entrepreneurs to re-enter the marketplace [more] quickly.” They also find “no reason for thinking that the quality of their projects will be any less” if bankruptcy laws were more forgiving.

But Do Increased Bankruptcy Protections Promote the Right Kind of Entrepreneurship?

This is where David Primo and William Green, authors of the identically titled Bankruptcy Law and Entrepreneurship (2011) disagree with Armour and Cumming. Primo and Green agree that bankruptcy promotes entrepreneurship. But they find both moral hazard and adverse selection traps in more relaxed bankruptcy laws. Specifically, the authors questioned the quality of ventures approached post-bankruptcy. They found that “[c]ounter to the conventional wisdom . . . more generous laws are linked to lower levels of ‘innovative’ entrepreneurship.”

Moral hazard. According to the authors, because bankruptcy “reduces the costs of an unfortunate outcome and blunts the edge of failure, it may lead individuals to start enterprises that are unlikely to succeed and have little upside potential.” In other words, if bankruptcy is too easy to obtain, too many entrepreneurs will attempt too many businesses doomed to failure from the start.

Adverse selection (or lemon market). The authors argue that creditors will charge higher rates to entrepreneurs with low-risk business models because more entrepreneurs with relatively bad business models will self-select into the market. In turn, the authors note, this “may cause individuals with low-risk projects to drop out of the pool, leaving only those individuals with high-risk proposals.”

So What Level of Bankruptcy Protection is Best?

For entrepreneurs, bankruptcy acts a form of insurance. Bankruptcy insures entrepreneurs against the extreme downside of the inherently risky undertaking of starting a new business.

To the extent that moral hazard exists, I believe that society should err on the side of encouraging new ventures despite the downside risk of failure. And I also believe that innovation in and of itself should not be a barrier to entry. New business owners (by definition, self-selecting) are prone to opportunistic behavior. For entrepreneurs, I think that’s a positive attribute. The initial assessment of a business’s “innovation” may not accurately reflect that business’s likelihood of long-term success.

Individual and institutional investors alike can also overcome any adverse selection problems by offering variable rates based on perceived risk. Investors are better at assessing risk than the authors give them credit. Providers of credit should do their homework prior to investing.

So how much bankruptcy protection is enough to encourage entrepreneurship without incentivizing failure? As Primo and Green find, “bankruptcy laws . . . should encourage entrepreneurial behavior in part by reducing the stigma of failure.” A failed business is one thing. But the prospect of losing one’s home, savings, and personal property is enough to discourage many entrepreneurs from starting a business.

Globalization and technological advances have led to a dramatically shrinking pool of old economy jobs. As a society, we should want to encourage self-employment and make entrepreneurship more attractive. The comparative severity and forgiveness of our bankruptcy code affect how entrepreneurs assess risk. Scholars agree that the availability of bankruptcy promotes entrepreneurship. Where reasonable minds differ, however, it is over the level of protection that should be provided to entrepreneurs.

Can I keep my car if I file for bankruptcy?

The answer to this question depends upon four main factors:

• Do you own the car outright, pay on a car loan, or lease the vehicle?
• Are you filing a Chapter 7 or Chapter 13 bankruptcy?
• Is your vehicle “exempt” under applicable bankruptcy law?
• What is the value of the vehicle and when did you buy it?

The bankruptcy automatic stay prevents creditors from collection activities, including repossession. Car loan servicers may not call you or otherwise attempt collection on debts while you are in bankruptcy. Instead, creditors must go through your bankruptcy attorney.

Do you own the car outright, pay on a car loan, or lease the vehicle?

Do you own your car outright (free and clear) or do you have a car loan? If you own the car outright (free and clear), your attorney must exempt the value of the vehicle using applicable exemption laws. The bankruptcy exemptions are addressed below.

If you have a car loan and want to keep the car, you may want to sign a reaffirmation agreement. This is a legally enforceable contract in your bankruptcy case that allows the car loan to pass through the discharge. Most lenders will insist that you sign a reaffirmation agreement. And most auto lenders will not send you monthly statements or report on-time payments to credit agencies unless a reaffirmation agreement has been filed. In some instances, lenders will simply repossess the car if you refuse to sign the agreement.

Reaffirmation agreements are strictly voluntary. Signing a reaffirmation agreement is a serious decision, and you should discuss with your bankruptcy attorney whether reaffirmation is in your best interests. Reaffirmed debts are not discharged, which means that the debt will survive the bankruptcy discharge.

If you lease a vehicle and file a Chapter 7 bankruptcy, you can either “assume” or “reject” the lease. If you assume (or keep) the lease, you will continue making the monthly payments and the lease will control. On the other hand, if you “reject” the lease, you must return the car to the creditor within 30 days of filing your statement of intention. If you surrender a leased vehicle, any residual debt will be discharged in your Chapter 7 bankruptcy case.

If you lease your vehicle and file a Chapter 13 bankruptcy, you can choose to either continue making the monthly lease payments or surrender the car back to the creditor. But your may owe a residual balance if your choose to reject the lease. The creditor will then file a proof of claim in your case for the balance of the lease due.

Are you filing a Chapter 7 or Chapter 13 bankruptcy?

If you file Chapter 7 and want to keep your car, be sure to remain current on your car loan prior to filing. If you are behind in your car payments when you file Chapter 7, the lender will move the court to allow it to repossess. This can quickly complicate the otherwise simple process of Chapter 7 bankruptcy.

In your Chapter 7 bankruptcy, you will file a Statement of Intention indicating whether you want to retain or surrender the vehicle. Either you will give up (surrender) the car and discharge the debt, or you will keep (retain) the car and continue payments. If you cannot afford the monthly payments on your car loan, then you should strongly consider surrendering the car. The auto loan balance will be fully discharged in your Chapter 7 bankruptcy.

If you are behind on your car payments, then Chapter 13 may be a better option for you. Chapter 13 bankruptcy protects your car from repossession and allows you to make up the missed payments through the Chapter 13 Plan. The amount you will ultimately have to pay for your car depends upon when you bought your car.

Is your vehicle “exempt” under applicable bankruptcy law?

Most Chapter 7 bankruptcy cases are “no asset” cases. That means that we can exempt your car from liquidation; the trustee will not confiscate and sell your vehicle. If there is little or no no equity in the car, the bankruptcy trustee will likely “abandon” the car, which means you get to keep it.

If you do have equity in the car over and above the value of the exemptions available, then you may be able to “purchase” the unprotected equity from the Chapter 7 trustee. Such agreements will be negotiated by your bankruptcy attorney.

Bankruptcy exemption laws protect certain amounts of value in your real and personal property. If the equity in an item of property is protected by an exemption, the trustee cannot take it. Here are the local vehicle exemptions:

District of Columbia:
DC Code Ann. § 15-501 – Motor vehicle to $2,575

Maryland:
Md. Code Ann. § 11-504(b)(5) – Property up to $6,000

Virginia:
Va. Code Ann. § 34-26 – $6,000 in motor vehicles

Federal:
11 U.S.C. § 522(d)(2) – $3,675 for your motor vehicle

In Virginia and Maryland, you must use the state exemptions. In Washington, D.C., you may use either the D.C. or federal exemptions. Your bankruptcy attorney may be able to “stack” or combine exemptions, depending on the value of your other property and the availability of other exemption amounts.

What is the car’s value and when did you buy it?

There are two main online resources for determining the current market value of your vehicle: the National Automobile Dealers Association Guide and Kelley Blue Book. These websites will help you to establish the range of values for your car based on make, model, year, mileage, and condition.

• Newer car loans. If your vehicle loan is less than 910 days old, you will have to pay the full value of the car loan. However we may be able to negotiate a reduced interest rate, which could dramatically lower your monthly payment.
• Older car loans. If the car loan is older than 910 days, your bankruptcy attorney may file a motion with the court to “cram down” the loan to the value of the actual car. If a cram-down is available, you may only have to repay a prorated amount equal to the present value of the vehicle.

Negotiate with Your Lender

Auto lenders make their money on interest. Repossession is expensive, and auto lenders attempt to avoid it if possible. Most lenders would rather have you keep your car and continue monthly making payments instead of having to repossess it. Your bankruptcy attorney will often be able to use your bankruptcy as leverage in negotiations with your lender.

If you decide to surrender the car in your bankruptcy, you will be free of the obligation to pay for it. Bankruptcy, after all, is your legal right to a fresh start. That includes the ability to free yourself from a vehicle you can no longer afford.

In some cases, a vehicle just isn’t worth the loan. But if you want to keep your car when you file for bankruptcy, be open to your attorney’s objective analysis of how your vehicle fits into your financial circumstances and goals.

Bankruptcy terms: A – C

Adversary Proceeding: A lawsuit related to a bankruptcy case and commenced by filing a complaint with the court under Fed. R. Bankr. P. 7001.

Assumption: An agreement to continue performing duties under a contract or lease post-bankruptcy.

Automatic Stay: An automatic, court-ordered injunction that stops lawsuits, foreclosure, garnishments, and all other collection activities against the debtor at the very moment a bankruptcy petition is filed. To learn more, read my article The Automatic Stay.

Bankruptcy: The legal procedure for solving intractable debt complications.

Bankruptcy Administrator: An officer of the court in certain districts who, like the U.S. Trustee, is responsible for supervising the administration of bankruptcy cases.

Bankruptcy Code: Title 11 of the U.S. Code, the law of federal bankruptcy.

Bankruptcy Court: Subsections of District Courts, the courts controlled by judges with expertise in bankruptcy law.

Chapter 7: The chapter of the Bankruptcy Code providing for “liquidation,” or the sale of the debtor’s nonexempt property. Proceeds are distributed to creditors. Many cases are considered “no asset.”

Chapter 9: The chapter of the Bankruptcy Code providing for reorganization of cities, towns, counties, utilities, and school districts.

Chapter 11: The chapter of the Bankruptcy Code providing for reorganization of corporations, partnerships and individuals with significant assets and income. A Chapter 13 for the wealthy.

Chapter 12: The chapter of the Bankruptcy Code providing for debt restructuring of a family farmers or fisherman. Infrequently used in the DMV.

Chapter 13: The chapter of the Bankruptcy Code providing for reorganization, usually over three to five years, of the debts of individuals with regular incomes. Otherwise known as the “wage-earner’s bankruptcy.”

Chapter 15: The chapter of the Bankruptcy Code dealing with cases of international insolvency according to the model law as promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997.

Collateral: Property subject to liens. Creditors with rights in collateral are defined as “secured creditors” and have additional protections under the Bankruptcy Code.

Confirmation: Approval by the court of a bankruptcy plan of reorganization.

Consumer Debtor: A debtor whose debts are primarily consumer debts, as opposed to debts incurred as a result of the operation of a business.

Contingent Claim: A claim that may be owed by the debtor under certain (or uncertain) circumstances.

Conversion: The process of changing chapters in bankruptcy, or “converting” a case from Chapter 7 to Chapter 13, or vice versa. Conversion is usually allowed, absent bad faith, at the request of the debtor.

Creditor: An individual, company or other entity to whom the debtor owes (or may owe) money.

Credit Counseling: A generally useless “briefing” from a nonprofit credit counseling agency that individual debtors must attend (online or over the phone) prior to filing under any chapter of the Bankruptcy Code.

Current Monthly Income: The average monthly income of the debtor over the six months prior to the filing of the bankruptcy petition.

Bankruptcy terms: D – F

Debtor: An individual or corporation who has filed for relief under the Bankruptcy Code.

Debtor Education: Equally useless as credit counseling, a very similar course to credit counseling that the debtor must complete to receive a discharge.

Debtor-in-Possession: In a Chapter 11 case, a debtor who remains in possession of the estate’s assets and who assumes the duties of a trustee. The debtor-in-possession is, in theory, a fiduciary for the creditors of the estate, and owes them the highest duty of care and loyalty.

Discharge: Complete financial relief from liability for a debtor from all dischargeable debts. A discharge prevents creditors from taking any action against the debtor to collect on debts. Moreover, creditors must report the debts as satisfied or discharged to credit bureaus. The “Discharge Order” prohibits all collection efforts of discharged debts.

Disclosure Statement: “Adequate information” provided to Chapter 11 creditors to enable them to evaluate the plan of reorganization.

Dismissal: Termination of a bankruptcy case without either discharge or denial of discharge, usually for fraud or technical deficiency.

Estate: All legal and equitable interests and property of the debtor at the moment of the bankruptcy filing.

Equity: The market value of a debtor’s interest in property less any liens and/or judgment interests.

Executory Contracts: In a Chapter 7 case, unexpired contracts or leases which the debtor may assume or reject.

Exempt Property: Property owned by the debtor that is protected by federal or state law from unsecured creditors. Many exemptions are available to debtors in Washington, D.C. and Virginia.

Fraudulent Conveyance: Transfer of an asset prior to and in anticipation of the commencement of a bankruptcy case, usually for less than adequate consideration.

Bankruptcy terms: I – R

Insider: A relative or agent of the debtor of an individual debtor, or an officer of a corporation.

Joint Petition: A single bankruptcy petition filed by husband and wife.

Lien: A perfected right to sell property to satisfy a debt.

Liquidation: The sale of a debtor’s property to benefit creditors.

Means Test: Calculations used to determine whether an individual debtor’s Chapter 7 filing is presumed to be an abuse of the Bankruptcy Code. “Abuse” is presumed if the debtor’s monthly income, over 5 years, is more than $10,950, or 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $6,575.

Meeting of Creditors: Required by Section 341(a) of the Bankruptcy Code, the meeting at which the debtor is questioned under oath by a bankruptcy trustee. Creditors may also question the debtor about his or her finances.

Motion to Lift the Automatic Stay: The legal method by which a creditor requests authority to act legally against the debtor, usually to foreclose against or repossess property.

No-Asset Case: A Chapter 7 case where there are no assets available to satisfy unsecured creditors’ claims.

Nondischargeable Debt: Debt that cannot be eliminated in bankruptcy. Mortgages, alimony, child support, taxes, student loans, and benefit overpayments are generally nondischargeable.

Petition: The document, containing basic information about the debtor’s assets and debts, and that commences a bankruptcy case.

Plan: A detailed prospectus of how the debtor proposes to pay creditor claims over a fixed period of time.

Preference: Payment, over $600 in the aggregate, made on a debt by the debtor within the 90-day period prior to the filing of the bankruptcy petition.

Priority Claim: An unsecured claim entitled to payment before other unsecured claims.

Proof of Claim: Documentation required of a creditor to verify a creditor’s claim against assets of the bankruptcy estate.

Pro Rata: The distributional allocation amongst multiple creditors based on the numerical proportion of their claims.

Reaffirmation Agreement: A court-approved contract by a Chapter 7 debtor that provides for continued payments on a collateralized debt.

Bankruptcy terms: S – U

Schedules: Detailed lists (labeled A-J) filed by the debtor with the petition. The debtor’s schedules catalog all of the debtor’s assets and liabilities, as well as other relevant financial information.

Secured Creditor: A creditor with a security interest in collateral possessed by the debtor. Mortgage companies are secured creditors because they hold an interest in real property until the mortgage contract is satisfied. Auto finance companies are secured creditors because they hold a security interest in a vehicle until that vehicle is paid for. Best Buy holds a security interest in a financed flat-screen TV until the financing contract is satisfied. Secured creditors have the right to repossess and sell any property in which they hold an interest to satisfy all or some of the claim.

Secured Debt: Debt backed by a security interest, such as a mortgage, collateral contract, or lien.

Statement of Financial Affairs: Affectionately referred to by bankruptcy lawyers as the SOFA, a statement containing information about the debtor’s income, transfers of property, lawsuits by creditors, business interests, losses, gains, accounting, and much more.

Statement of Intention: A declaration made by a Chapter 7 debtor concerning plans for dealing with consumer debts secured by property of the estate. Read my article What is the Statement of Intention?

Trustee: A private individual, usually an experienced bankruptcy lawyer, who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. Trustee. The trustee reviews the debtor’s petition and schedules and conducts the Meeting of Creditors. In Chapter 7 cases, where necessary, the trustee liquidates portions of the debtor’s estate and makes distributions of the proceeds to creditors. In Chapter 13 cases, the trustee oversees the debtor’s plan, receives payments from the debtor, and disburses payments to creditors in accordance with a confirmed plan.

U.S. Trustee: An officer of the Department of Justice who ensures the proper administration of a bankruptcy case.

Undersecured Claim: An “under-water” collateralized interest, or a debt secured by property worth less than the full amount of the claim.

Unsecured Claim: In contrast with secured claims, unsecured claims are those in which creditors have no interest in collateral and in which credit was extended based solely upon an assessment of the debtor’s future ability to pay. Unsecured claims are treated very differently in bankruptcy than secured claims.