Going through bankruptcy is tough. It takes the advice of a good lawyer or a finance expert to make sure that you do everything right and well. On top of it all, the intricate nature of the process and the emotional impact of the proceedings can make the entire bankruptcy feel more complicated than it is. Do yourself a favor and make sure that you learn the bankruptcy lingo and terms before you begin the filing procedures.
Learning Bankruptcy Lingo:
1. Chapter 7 Bankruptcy
Chapter 7 is what most people think of when they think of bankruptcy. It involves liquidating your assets and discharging unsecured debt. In some cases, you will be forced to sell assets to satisfy your creditors if you do not pass a means test, but you will usually be able to keep most, if not all, of what you own. It takes around four months to complete the process.
2. Chapter 13 Bankruptcy
You also have the option to reorganize your debts with a Chapter 13 bankruptcy as long as you have a regular income. This type of bankruptcy forces your creditors to allow you to repay what you owe on a payment plan. Sometimes amounts are reduced, sometimes not. Sometimes you get big savings on interest, sometimes it’s just about giving you extra time to pay everything off. It’s called reorganization. The process may take a few years, but you’ll be able to keep everything.
3. Chapter 11 Bankruptcy
If you have a business and your debts stem from running that enterprise, you could qualify for a Chapter 11 bankruptcy. This is like a Chapter 13 bankruptcy for your business. Through the help of the bankruptcy courts, you will reorganize your debt, keep your business open if you like and pay back your company debts over time.
4. Automatic Stay
In either case, when you file a bankruptcy petition, all collection activity is required to stop. Foreclosures, collection phone calls, penalty rates — all this stops as soon as you file for bankruptcy and let your creditors know about your situation.
Anyone to whom you owe money or claims to be owed money by you is referred to as a creditor. This could be a person or a company. Bankruptcy filings are public, so sometimes a creditor will contact the bankruptcy court if they have been left off of your petition. Try not to let this happen. It is important that you list all your creditors in your bankruptcy petition or else it could derail the proceedings.
The formal acknowledgment that you owe a creditor is called a claim. These claims are an important part of your bankruptcy filing.
When a creditor has a legal right to take your property or sell it to satisfy your debt, this is called a lien.
After you complete your bankruptcy proceedings and you are successful, eligible debts will be discharged. This means that your creditors cannot pursue further action against you. Your debt with them is over and satisfied. It is important to note that while many debts can be discharged, some cannot. If you owe alimony, are behind on your child support or have back taxes, you cannot discharge that debt, and there are many other similar types of debt. Your situation also matters. Sometimes, the court decides whether it is appropriate for you to discharge a debt.
9. Non-dischargeable Debt
Debts that cannot be discharged are referred to as non-dischargeable.
If you are unsuccessful in your bankruptcy filing, it may be dismissed. This means that the bankruptcy court has decided to throw out your petition. Your creditors will be free to pursue collection or litigation (aka sue you) in order to get a court to force you to repay your debts.
When you file for any type of bankruptcy, you will need to list out all your assets and debts. The court then determines if an asset should be liquidated to help pay for a specific debt. However, there are some assets that exempt. These are called exemptions or exempt property. For instance, there is a homestead exemption that could allow you to keep your home. Also, bankruptcy petitioners are often permitted to keep their “tools of trade” — such as your computer if you are a graphic designer or your tools if you are a mechanic.
12. Means Test
The Means Test is bankruptcy lingo used in Chapter 7 bankruptcies to determine whether the person filing for bankruptcy is abusing the system. “Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $12,850, or (ii) 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $7,700,” explains U.S. Courts. “The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.”
Understanding the Bankruptcy Lingo saves you time!
Bankruptcy can be a stressful time. Don’t make it harder than it needs to be by not understanding the bankruptcy lingo being used. Spending time differentiating between key concepts will make understanding your bankruptcy options easier and take some of the strain out of the process.
Chapter 13 Info, “Dismissal vs. Discharge.” [Accessed: http://www.chapter13info.com/dismissalvsdischarge.html]
Smith, Carrie, “Seven Things to Know When Filing for Bankruptcy,” The Simple Dollar, December 1, 2016. [Accessed: http://www.thesimpledollar.com/what-to-expect-when-filing-for-bankruptcy/]
US Courts, “Bankruptcy Basics Glossary.” [Accessed: http://www.uscourts.gov/educational-resources/educational-activities/bankruptcy-basics-glossary]