Bankruptcy Glossary of Terms
Below you will find some of the most common terms heard in and around bankruptcy cases. While the following definitions provide a nice introduction to this bankruptcy terminology, be sure to speak to a local bankruptcy attorney for even more information on their meanings.
Simply fill out our free bankruptcy case evaluation form or call 1 (877) 349-1309 to be connected with a local bankruptcy lawyer as soon as possible.
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:small amount, short-term, high-interest loans given by banks to those who overdraw their accounts.
Abusive overdraft loans have become the norm for most banks, and cost consumers billions of dollars each year. Learn more about abusive overdraft loans.
Adjustable Rate Mortgage (ARM):mortgage loan with a monthly payment that "adjusts" or changes from month to month. Compare to a fixed rate mortgage, in which payments remain constant throughout the lifetime of the loan.
When the housing market was strong, mortgage "innovations" like ARMs were marketed aggressively, often to borrowers who didn't fully understand and/or couldn't afford the loans. As a result, many borrowers defaulted on payments, which touched off the foreclosure crisis.
Asset: any item of value owned by a person or entity.
In Chapter 7 bankruptcy, the trustee can convert non-exempt assets to cash to repay creditors.
Automatic Stay: an injunction (provision) of bankruptcy law that protects those who file bankruptcy from most collection actions, including garnishment, lawsuits, repossession, debt collection and foreclosure.
In most cases, an automatic stay goes into effect as soon as a bankruptcy case is filed.
Bankruptcy: a legal declaration by an individual (or a company) stating an inability to pay creditors. United States Bankruptcy Code provides several versions of bankruptcy to offer individuals a "fresh start" financially after receiving a bankruptcy discharge.
Individuals can file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, depending on their financial situation and goals for bankruptcy. Click here for more about the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy.
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Bankruptcy Petition: the legal forms that must be filed at court for a bankruptcy case to officially begin.
Once your lawyer has filed your bankruptcy petition with the court, you can expect different events from Chapter 13 bankruptcy cases and Chapter 7 bankruptcy cases.
Bankruptcy Trustee: an individual appointed by the U.S. Department of Justice or by the creditors in a bankruptcy case to oversee the proceedings of the bankruptcy case.
In Chapter 7 bankruptcy cases, the trustee is in charge of gathering and distributing any non-exempt property. In Chapter 13 bankruptcy cases, the trustee must distribute the debtor's monthly payments to the creditors, and makes sure everyone involved adheres to bankruptcy laws.
BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act): the new bankruptcy laws passed in October, 2005. BAPCPA introduced a qualifying "means test" for potential Chapter 7 bankruptcy filers, made credit card debt more difficult to discharge in bankruptcy filings and added the Credit Counseling and Debtor Education requirements. Detailed government site on BAPCPA.
Chapter 7 Bankruptcy: a type of personal bankruptcy sometimes referred to as "liquidation" bankruptcy because a bankruptcy trustee can liquidate (convert to cash) any non-exempt assets to help pay off debts.
In order to qualify for Chapter 7 bankruptcy, you must pass the Chapter 7 means test. Those who don't qualify for Chapter 7 bankruptcy can file under Chapter 13. Click here for details on Chapter 7 bankruptcy.
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Chapter 13 Bankruptcy: a type of personal bankruptcy sometimes referred to as a "reorganization of debts." In Chapter 13 bankruptcy cases, debtors work with the bankruptcy court to develop a three to five year repayment plan to eliminate their obligations to creditors.
Chapter 13 bankruptcy generally allows filers to keep their homes and cars, and offers a chance to get caught up on debts. Click here for details on Chapter 13 bankruptcy.
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Checkbook Loan: a term introduced in Illinois to rebrand loans offered by payday loan stores in efforts to skirt state regulations against payday loans. See Payday Loan.
Collateral: an asset given as security for a loan.
In a mortgage loan, the house is considered collateral for a loan: if the borrower doesn't repay the loan as agreed, he will lose the house. The borrower has an incentive to keep up with payments: being able to live in the house.
Cosigner: one who literally co-signs loan papers with somebody else. Legally, a cosigner is responsible for making payments on a loan if the primary borrower is unable to do so.
People rebuilding after bankruptcy can sometimes qualify for more attractive loan terms by enlisting a cosigner with a strong credit history.
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Credit Counseling Briefing: sometimes called the "ticket in" to the bankruptcy process. The Credit Counseling Briefing must be completed before you file your bankruptcy petition for a judge to accept your case. Credit Counseling Briefings can be completed on the Internet, over the phone or in person. Click here to purchase an approved Credit Counseling Briefing.
If your Credit Counseling Briefing is not completed in the allotted time, your bankruptcy judge is likely to throw out your bankruptcy case. Click here for more details about the Credit Counseling Briefing.
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Credit Report: a record of your credit history which includes your payment actions on a variety of credit sources, including credit cards, mortgage loans, rent, car loans and more. The Fair Credit Reporting Act of 2003 mandated that all consumers have access to one free credit report per year from each of the big three credit reporting agencies (Equifax, Experian and TransUnion).
Checking your credit report regularly is essential to your credit health. Regular checks can help you avoid identity theft and make sure your information is being reported accurately. Identity theft and mistakes on your credit report could end up costing you thousands in stolen funds and unfavorable loan terms. Credit reports are becoming more important in the financial landscape of the United States. Click here for news articles about credit reports.
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Credit Reporting Agency (Credit Bureau): an organization that collects, documents and reports consumer credit information. CRAs offer free credit reports to consumers, which are available at www.annualcreditreport.com.
The three major CRAs are TransUnion, Equifax and Experian. Note that the website listed above is the only site on the web that guarantees you a free credit report with no strings attached. Sites with similar names advertise free credit reports, but often charge you for products and services you don't need.
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Credit Score: a number between 300 and 850 that measures the credit risk of an individual consumer. The number is calculated with a formula developed by the Fair Isaac Corporation, and is used by lenders to assess how much potential borrowers can afford.
Borrowers with low credit scores are considered "subprime," and are considered high lending risks. Those with high credit scores are considered "prime," and generally qualify for more favorable loan terms and larger loans. Click here for news articles on credit scores.
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Creditor: someone to whom a debtor owes money.
In Chapter 13 bankruptcy cases, filers work within a repayment plan to satisfy most or all of their financial obligations to creditors.
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Debtor: someone who owes money to a creditor.
Many people file for bankruptcy in order to clear debt by repaying the money they owe their creditors or by receiving a discharge from the bankruptcy court.
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Debtor Education: a requirement of the BAPCPA, the Debtor Education course must be completed by every bankruptcy petitioner. You cannot receive your bankruptcy discharge until you have completed the Debtor Education course.
The course is designed to prepare bankruptcy filers for life after bankruptcy. The skills taught in the Debtor Education course include debt management and money-handling, and are intended to help filers take advantage of the fresh start bankruptcy provides.
Default: the failure to meet financial obligations. Also, the state of being behind on payments: if you miss a certain number of loan payments, you will have defaulted on your loan and your loan will be in default.
Once a loan has gone into default, the lender can take collection action, including repossession, foreclosure or garnishment, depending on the type of loan.
Discharge: 1. Exit from bankruptcy .You will receive your discharge after cooperating with all the terms and conditions of the bankruptcy court. 2. The elimination of debt. In Chapter 7 bankruptcy filings, unsecured debts can be discharged, or excused by a bankruptcy judge.
Dischargeable: legally excusable, as debts. In Chapter 7 bankruptcy cases, for example, most credit card debt, medical bills and most personal loans are dischargeable. Student loans, child support and most tax debt are usually considered non-dischargeable.
When a debt is discharged during bankruptcy, the debtor is cleared of his payment obligation.
Equity: an asset's value aside from anything owed on it (mortgages, liens, etc.).
If you've been paying off a mortgage loan for several years, you probably have some equity in your home. In other words, if you could sell something for more than it would cost you to pay off anything you owed on it (such as mortgages and liens), you have equity in that asset.
Exemptions: assets that the bankruptcy court cannot liquidate during a Chapter 7 bankruptcy case.
Each state has unique exemptions, but filers are commonly excused from having their homes, work tools and some personal property liquidated, among other items.
FICO Score: your credit score, as calculated by the Fair Isaac Corporation. The FICO score is the most commonly used among lenders for determining borrowers' level of risk.
This is the number between 300 and 850. Scores on the higher end of this spectrum will qualify you for favorable loan terms, while lower scores will likely make it more difficult for you to get loans.
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Fixed Rate Mortgage: the "traditional" home loan plan, fixed rate mortgages require borrowers to pay a constant payment over the life of the loan (usually about 30 years). Compare to "adjustable rate mortgage."
The nontraditional, non-fixed rate loans offered to many borrowers during the recent housing boom were referred to as "innovations" in the mortgage market. In reality, these "innovations" seriously contributed to the current credit crunch and foreclosure crisis.
Foreclosure (Mortgage Foreclosure): the process followed by a bank or mortgage company to reclaim ownership of a house when a homeowner hasn't followed the terms of the mortgage agreement. In most cases, foreclosures result when homeowners can't make monthly mortgage payments.
The so-called foreclosure crisis and credit crunch gripping the United States can be attributed in part to vast speculation in the mortgage market and the marketing of non-traditional home loans to buyers who had no idea what they were getting into.
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Garnishment: when money owed a debtor (like part of a paycheck) is ordered given to a creditor (like a credit card company) to cover some of the debt owed.
If you owe money and your wages are garnished, they will be given directly to your creditor. Bankruptcy's automatic stay will stop most garnishments.
Identity Theft: the crime of using someone's identification information (Social Security Number, bank account information, credit card numbers, etc.) to pose as that person. Once stolen, an identity can be used to open credit accounts, drain current accounts, run up debt and much more.
Checking your credit report on a regular basis is one of the best ways to make sure you aren't victimized by identity theft.
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Insolvency: see "bankruptcy."
Lien: a claim, or mortgage, on property in exchange for debt owed.
Liens can be voluntary or involuntary; home mortgages and auto loans, for example, are voluntary liens. You agree that your creditor can have the house or car back if you can't make payments. Involuntary liens result when a judge rules that you must surrender property to a creditor (as in a lawsuit).
Liquidation: the act of converting an asset to cash.
In Chapter 7 bankruptcy, the trustee can liquidate a filer's non-exempt assets to pay off creditors. In many Chapter 7 cases, though, filers don't have any non-exempt assets, so liquidation rarely occurs in practice.
Mass Layoffs: when a company or organization is forced to let go a large number of workers at the same time, usually because of financial difficulty or reorganization.
For updates on mass layoffs statistics, you can visit the Bureau of Labor Statistics or Total Bankruptcy.
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Means Test: part of the BACPA, the Chapter 7 means test is used to determine who qualifies for protection under Chapter 7 of the U.S. Bankruptcy Code. It's based on median income comparisons, disposable income available and unsecured debts owed.
You must "pass" the means test to file for Chapter 7 bankruptcy. Find out details here.
Medical Bankruptcy: bankruptcy caused by debts incurred from medical expenses.
Studies have found that medical bankruptcy is the second most common causal factor of bankruptcy in the United States. As many as half of all bankruptcy filings could be attributed mainly to medical expenses. Follow this link for more information on medical bankruptcy.
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Mortgage: a pledge to pay (loan) backed by real estate. If you have a mortgage on your home, you risk losing the property if you don't comply with the terms of the pledge (loan).
Most people use mortgages to pay for houses because few people can afford to pay the full price of a home in cash.
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Non-Dischargeable: legally unable to be excused.
In Chapter 7 bankruptcy cases, child support, tax debt and student loans are usually non-dischargeable and must eventually be paid by the filer.
Non-Revolving Credit: a line of credit that requires monthly payments and does not allow repaid funds to be drawn down again from the credit limit.
Some credit cards are revolving credit charge cards, which means that there is no interest to be paid, but the entire balance has to be paid off at the end of each month. Also called closed account credit cards.
Payday Loan: offered by payday lending stores, these short-term, small-dollar amount, high interest loans are marketed to those who need cash between paychecks. In reality, they can lead to a devastating cycle of debt that can be difficult to escape.
Many states have taken legislative action to restrict or eliminate payday lending action, and understandably so - annual interest rates on payday loans can be as high as 390%! Visit these links for a more detailed look at payday lending stores and the practices used by payday lenders.
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Predatory Lending: though no legal definition exists for predatory lending, it usually refers to tactics used by lenders to convince borrowers to agree to unfavorable (read "expensive") loan terms or to deceive the borrower in some way for profit. Examples of predatory lending include lying about the terms of a loan included on documents a borrower must sign and targeting specific groups of people with expensive loans.
Payday loans, some credit cards, some subprime mortgages and abusive overdraft loans have all been used as examples of predatory loans.
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Repossession: the reclamation of ownership of property when payments aren't made on time.
If you default on your car loan, your lender might repossess your car. Bankruptcy's automatic stay will stop most repossession actions.
Revolving Credit: a line of credit that allows spending and repayment as desired with a variable minimum payment and a service charge.
Credit cards are the most popular form of revolving credit, but checking account cash reserves and pre-approved overdraft accounts also are standard revolving credit lines for consumers.
Schedules: in bankruptcy, these are the documents filed with the court that contain information on your assets, debts and income.
Once your lawyer has filed your bankruptcy petition, he or she will file schedules and other paperwork throughout your case.
Secured Debt: any debt backed by collateral (material goods).
A mortgage loan is secured, backed by the house. Securitization of debts reduces the risk for lenders, since the collateral can be repossessed if the borrower fails to comply with the terms of the loan.
Subprime Loan: a loan given to someone with a low credit score or shaky credit history. Subprime loans have less favorable (read "more expensive") terms than prime loans because they pose a bigger risk for lenders.
During the recent housing market boom, subprime lending grew tremendously in popularity. Unfortunately, the strong market eventually weakened and the subprime loans were seen for the risky ventures they were. Now, lenders and investors lost billions, and millions of American families are struggling to save their homes from foreclosure.
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Unsecured Debt: any debt not backed by collateral.
Credit card debt is unsecured, since creditors cannot repossess any property as a direct exchange for debt owed. A creditor could sue to get property in exchange from unsecured debt.
United States Bankruptcy Code: the collection of statutes and regulations that governs how bankruptcy courts in the United States run.
Click here to view the full U.S. Bankruptcy Code.
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