Sometimes it’s hard to understand bankruptcy websites and articles because they use so many special words or key bankruptcy terms with special legal meanings. We’ve found that some websites use these key bankruptcy terms over and over without any definition despite the fact that clients and site visitors are left in the dark. So let’s shine a little light on some of these frequently used key bankruptcy words and terms. Of course, if you ever need a little more help or information, just call us at 1(800) 551-7922 or send us a note through the contact forms available on this website.
An injunction that protects you from your creditors. It happens immediately and “automatically” at the moment you file your bankruptcy petition. This injunction is not permanent and in particular cases some creditors (like mortgage holders or vehicle lien creditors) can obtain “relief” from this stay so that they can retake possession of their loan collateral when the debtor can’t afford to make the payments due on the collateralized loan. Nevertheless, this automatic injunction or stay promptly stops foreclosures, the IRS, repossessions, lawsuits, collection phone calls and other actions to collect debts. It allows for kind of a cooling off period while the bankruptcy court deals with the important issues in the case and acts to permanently determine the rights of creditors, if any, during the bankruptcy case.
A term that refers to several kinds of forms filed by the debtor with the bankruptcy petition (or filed very shortly thereafter). These forms include various lists of assets (separated by type of assets), lists of debts (again separated by type, such as “secured”, “priority” and “unsecured”), a list of “exemption claims” made by the debtor, a statement with information about the debtor’s recent financial transactions (like property transfers), an income and expense statement (like a budget) and a mailing list for all creditors and interested parties that are entitled to notice in your case. Of course, there are “official forms” for these Bankruptcy Schedules that must be used and some Local Bankruptcy Rules about these issues also.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is often called the “New Bankruptcy Law.” This Act became law in 2005 and, among other things, it has made it more difficult for some consumers to file Chapter 7 bankruptcy because it put in place something called the “Means Test.” For example, Chapter 7 debtors must now provide a detailed income and expense statement when they file so that the Trustee and the Bankruptcy Court can sort out which people may not “qualify” for a Chapter 7 discharge under this new Means Test. But have no fear because your expert lawyer will help you. And even if you don’t qualify for Chapter 7, you may still use Chapter 13 to protect assets and to pay some “net available income” to creditors through a reorganization plan.
The State Bar of California has a very specific set of rules that control which attorneys are allowed to refer to themselves as “certified” experts. These rules require consumer bankruptcy lawyers to meet a special set of high competency requirements in order to be considered and referred to as “certified consumer bankruptcy law specialists.”
The Bankruptcy Code (Title 11, United States Code, Section 101 et. seq.) is separated into Chapters. Some of these Chapters contain laws and general provisions that apply to all or most all bankruptcy cases. A few of these Chapters actually contain the specific laws that provide particular kinds of bankruptcy relief to individual debtors, including Chapter 7, and this is why we say “the debtor filed a Chapter 7 bankruptcy.” Chapter 7 creates a process that allows debtors to get a discharge from their debts so that they can start their financial lives over. Chapter 7 creates a bold “line in the sand” which is the date of the filing of the petition. All debts that arose before that date are discharged, with a few exceptions. All debts that arise after that date are not discharged. The debtor gets to keep or protect certain property that is claimed as “exempt” in Chapter 7. If there is any unprotected property, it is collected and sold by the Bankruptcy Trustee and the surplus proceeds are distributed pro rata to creditors. Sometimes Chapter 7 cases are called “liquidations”, but in reality, the overwhelming majority of cases pass through the system without the Trustee selling or liquidating any property; these cases are called “no asset cases” and they make up the huge majority of all cases filed.
Under this Chapter of the Bankruptcy Code (Title 11, United States Code, Section 101 et. seq.) the debtor proposes a plan of arrangement (also called a “reorganization plan”). There is a body of complex rules and laws that control what such a Plan “must” contain and what it “may” contain. A Chapter 13 Plan typically allows the debtor to keep a home in foreclosure. Instead of losing the home to a rapid foreclosure sale, the bank is forced to wait for the delinquent payments to be made up by the debtor through a steady stream of small additional payments made over 3 years (while the regular monthly mortgage payments continue). In the same way a debt to the IRS can be paid back over an extended time in order to avoid wage garnishment or lien enforcement. A Chapter 13 Plan must then use “excess income” (after reasonable living expenses) to pay whatever is left to general creditors. Sometimes these creditors receive a very small percentage of their claims through a Plan; and yet such a Plan can still be used to preserve assets. This is a very powerful tool to use when you don’t qualify for Chapter 7 or when you don’t have the cash to save your home or other assets immediately in hand.
Debts that arose from personal, family or household needs rather than debts incurred to pay business expenses.
To determine your CMI, you look backwards for 6 months before your filing. This important Bankruptcy term (Current Monthly Income) is a key part of the “Means Test” under the New Bankruptcy Law. It refers to the average monthly income of the debtor over the 6 calendar months before the filing of the bankruptcy petition. Your CMI includes more than just earnings. It includes regular contributions to household expenses from nondebtors and income from the debtor’s spouse if the petition is a joint petition. CMI does not include any social security income or certain other payments made because the debtor is the victim of certain crimes. One key concept that arises from this CMI definition is that it may greatly affect the date that you and your expert bankruptcy lawyer choose to file your Chapter 7 petition. If you are close to “failing” the Means Test, and your income is rising, it will be important to file your petition very quickly to take advantage of this “look back period” as part of your attempt to qualify to file Chapter 7.
The debtor in a consumer bankruptcy case is an individual that files bankruptcy. In a joint petition, where a married couple file one bankruptcy petition, they are referred to as “joint debtors.”
When an individual debtor has done something very wrong under the Bankruptcy Code, the Bankruptcy Court, in a legal proceeding brought against the debtor, can deny the relief from debts that the debtor normally gets. The order made by the Court in such a case is called a Denial of Discharge and the legal effect is that the debtor will forever owe the debts that pre-existed the bankruptcy petition.
This is the essence of bankruptcy, also known as the “fresh start.” It is an order of the Bankruptcy Court that enjoins (stops) creditors from ever collecting or attempting to collect a debt that is was properly disclosed and that is part of the bankruptcy case. The legal effect of the Discharge is like a very broad “release of personal liability” for debts.
This term refers to an order of the Bankruptcy Court that dismisses a bankruptcy petition (a case). If your bankruptcy case is dismissed, there are some negative consequences if you file a new bankruptcy petition within certain time periods. For example, you may lose the full benefits of an automatic stay in your subsequent case.
Exemptions are “claims” made by the debtor in the Bankruptcy Schedules that assert the rights of the debtor to protect and keep certain types and amounts of property under applicable State law and the Bankruptcy Code. When we asset a claim of exemption under the law, we are telling the Trustee and the creditors that they can’t touch that property. Exemption claims are sometimes challenged by the Trustee, especially if they are improperly identified under the law. If this occurs, the Court will decide whether the exemption claim is proper and in what amount(s). Exemption claims are typically made under the law to protect a home, a car, personal belongings, furniture, furnishings, so-called tools of the trade or even excess cash. If exemption claims won’t likely protect all of your important property, then it may be necessary to consider a Chapter 13 plan that might allow you to keep everything you own and pay some net money to unsecured creditors over time.
One of the most difficult parts of planning and filing a bankruptcy case is determining what bankruptcy exemptions to use and how to use them. This is true because this area of the law is a confusing mixture of Federal law and State law. Most states force you to use their state exemptions. Some of the states (17 of them) allow you to choose between the state’s list of exemptions and the Federal list provided in the Bankruptcy Code. California is fairly unique because it has 2 lists (or “sets”) of state exemptions that debtors may choose from. As in California, if you have a “choice” system, you must choose one complete list or the other. You are not allowed to mix and match from both lists.
Sounds bad right? It is. This term refers to any deed or gift or other transfer of an asset that a debtor makes before filing bankruptcy if that transfer was made: (a) in an attempt to hide, remove or conceal assets from creditors and the Trustee; or (b) was simply made by the debtor without the debtor receiving in kind a fair value for the transfer.
The bankruptcy Trustee in your case has the power to sue you and the person or “entity” that received the benefit of the transfer. The Trustee can rely on Federal bankruptcy law or any law that exists in your State that allows creditors to recover property when unfair or fraudulent transfers are outside of bankruptcy. If the Trustee wins such a lawsuit, the Trustee can recover the assets or get a money judgment for their value against anyone who receive some benefit from the improper transfer. And here’s the worst part. If the asset you transferred was a home or some other property that you could have claimed as “exempt” or otherwise protected with proper planning, you will lose the right to claim that exemption.
Here we go with the Means Test again! This term is an important part of understanding how the Means Test applies to your income and expense situation. “Hypothetical Living Expenses” are a combination of national and local expense standards that are published by the IRS. These standardized expenses are updated annually by the IRS. Because these expenses are hypothetical,
they might accurately reflect your circumstances or they might be well below or above your actual expenses. Nevertheless, these hypothetical numbers must be used for some (but not all) of your expenses in applying the Means Test against your gross income. Your net remaining income after applying this “Test” will determine whether you have too much net income to qualify for Chapter 7. The unfair and arbitrary nature of this test (arising from “hypotheticals”) is part of why Bankruptcy lawyers think this Test is inappropriate. The actual standards that apply to your case can be found on a website maintained by the Department of Justice and the United States Trustee program. Or you can ask us for a free consultation and we’ll do a free analysis of your situation under the Means Test, applying the Hypothetical Living Expenses where appropriate, and we’ll show you what it means for you.
Do you “qualify” to file Chapter 7? Probably, but to be certain we will have to look at the Means Test under the New Bankruptcy Law if your income has reached a certain threshold level (“Median Income”). The Means Test is an artificial formula established under the 2005 changes to the Bankruptcy law which uses your actual income and then compares it to a combination of your actual living expenses and certain “Hypothetical Living Expenses.” The purpose of the comparison is to determine if you have enough net income such that you the law deems you capable of paying back some reasonable percentage of your general debts (your unsecured general creditors). If you “fail” this Means Test, your Chapter 7 case is presumed to be an “abuse” and it will be dismissed unless you choose to convert your case to a Chapter 13.
The median income for a specific region of the country where your bankruptcy case is filed, as determined by Federal Census data. This is a number that is used as part of the “Means Test” to determine if any calculation under the Test should be made for your income situation. If your actual income is above the Median Income for your area, your situation will need to be evaluated in advance to see if the Means Test could result in you not qualifying for Chapter 7 bankruptcy relief. Of course, the Median Income that will apply to your case will depend on a few other factors besides geography. Factors like the size of your household and the number of earners in your household. The income table that apply to you can also be found on a website maintained by the Department of Justice and the United States Trustee Program.
This term refers generally to any assets owned by the debtor that can’t be protected by exemptions under the applicable State and Federal exemption laws. Such assets are at risk of being taken by a Chapter 7 Bankruptcy Trustee and liquidated to pay creditors. This term can apply to an actual asset (such as a piece of jewelry) or it can apply to the “net equity” available from an assets after any proper liens are paid off (like the “homestead exemption” or an exemption that protects equity in an automobile).
Your Bankruptcy Petition is the Court document that “starts” your case. It is part of the package of documents that must be filed to commence and maintain a petition for relief under the Bankruptcy Code. Think of your Petition as your formal request to the Court for debt relief.
Also called a Plan of Arrangement, or Reorganization Plan, this term is used in both Chapter 13 and Chapter 11. It is most relevant in Chapter 13 for individuals. It contains a description of your debts by category and a description of how (and how much) you intend to pay claims over time in each category. The typical term of payments under a Plan is 3 to 5 years.
Expert bankruptcy lawyers are constantly on alert for any opportunities to plan in advance of a bankruptcy petition to allow debtors to take full advantage of the legal system of exemptions that protect property in a bankruptcy case. It is possible to arrange or rearrange a debtor’s property in ways that let the debtor take full advantage of available exemptions in order to keep as much property as possible. This is a legal process that is much the same as the planning that CPA’s and tax lawyers engage in to protect your income and property from taxes. Pre-bankruptcy Planning should be done with an expert bankruptcy lawyer.
The Bankruptcy law allows Trustees to “look back” 90 days before the filing of a bankruptcy petition and to set aside or recover any payments or other transfers to creditors that were made to pay debts if they were not in the “ordinary course of business of the debtor.” This 90-day look back period is extended to 1 year if the payment or transfer was made to a relative or “insider” of the debtor. This is a complex area of bankruptcy law with detailed rules and practices that apply. But here’s a simple example: You know you’re going to file bankruptcy, so a couple of months before you file you start paying some of your old debts, but not all of them—like the money you owed to your brother or old bill you owed to the doctor. The bankruptcy Trustee could sue to get that money back. Too bad for you, especially if there was a way to plan and protect those funds in your bankruptcy case so that they would be available to you after you file.
Here we go with the “Means Test” again! This term refers to the net income result of the Means Test calculation. It refers to the monthly amount of money that the Means Test determines you “should have” available to pay to creditors after your actual and hypothetical expenses are deducted from your actual income (Current Monthly Income or CMI).
Sometimes a debtor and a creditor think that it makes sense to agree (“reaffirm”) that a dischargeable debt (like and car loan) should survive the discharge and be enforceable after bankruptcy. For example, if a debtor want to keep his or her car in a Chapter 7 case, the bank might insist that the debtor agree to a “Reaffirmation” in order for the debtor to keep the car and avoid a repossession after bankruptcy. Although these agreements are generally not advisable, in order for the debtor to do a Reaffirmation, there must be a Court hearing and the Bankruptcy Judge must approve such a contract. Remember that the discharge of debts is critical to the concept of a “fresh start” so when a debtor wants to agree to give up this benefit with respect to a particular debt, the Court will scrutinize the facts carefully.
This term refers to a Plan in a Chapter 13 case where a debtor is allowed to keep property, make adjustments to debts according to the law and pay the adjusted debts over time. Sometimes the terms “Reorganization” and “Chapter 13” are used interchangeably. Reorganization may also refer to a Chapter 11 case which can be filed by business entities and by individuals. The Chapter 11 Reorganization process is far more complicated and expensive so it is typically only used by individuals who do not qualify for Chapter 13 because their debt amounts exceed the jurisdictional limits for Chapter 13.
The Bankruptcy “Trustee” in a Chapter 7 case is the person appointed by the Court system to administer any assets and to insure that the debtor has complied with the law and the rules in the case. The Trustee exercises various legal powers provided under Bankruptcy law and acts as a representative for all the creditors in the case. A private individual, the Trustee’s duties include the duty to review the debtor’s Bankruptcy Schedules, to file any necessary lawsuits against creditors or other parties to recover assets, to review and settle claims if necessary and to make pro rata distributions to creditors if assets or funds are recovered or available in the case. If there are no assets that will benefit creditors in the case, the Trustee files a report called a “No Asset Report” and the case is closed. There is also a Trustee in Chapter 13 cases (commonly called the “Standing Trustee” because the same person oversees all the Chapter 13 cases in a typical District) and this Trustee has similar duties plus the duty to oversee the debtor’s Reorganization Plan and make payments to creditors. The Chapter 13 Trustee also has the power to “object” to the debtor’s Plan and argue against the Plan before the Bankruptcy Judge. But only the Bankruptcy Judge decides whether a Plan will be “confirmed.”