Glossary

by Law Office of Edward Gonzalez, PC.

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401K plan: A federally-qualified, tax-deferred retirement plan. In bankruptcy, the plan is exempt from creditors because of an anti-alienation clause barring its distribution to creditors for a debt of the beneficiary-debtor.

A

Assessment: For bankruptcy purposes, an assessment is a determination of the actual amount of taxes owed by the debtor and takes place when the IRS formally notes this in its records.

Automatic stay: A stay is a court order stopping a stated action. In bankruptcy, such a stay goes into effect immediately upon submitting the filing to the court clerk and halts all creditor enforcement actions.

C

Chapter 7: Also, known as a liguidation bankruptcy, the debtor basically asks the court to release him from liability for his debts, in return for giving up whatever property he has to his creditors, subject to exemptions available in his state.

Chapter 13: Also, known as a debt readjustment or reorganization, the debtor basically asks the court to release him from liability for his debts, in return for paying to his creditors, over time, a proposed amount which generally includes the value of nonexempt property, priority debts, secured debts, mortgage arrears (if any), trustee's fees and a stated percentage of unsecured debts.

Chapter 11: A reorganization bankruptcy, generally for businesses, but also for individuals with substantial debts that do not qualify as wage-earners under Chapter 13, which provides substantial flexibility to the debtor to restructure his financial affairs. (See "reorganization.")

Cash flow: The actual dollars coming into and going out of a business or individual's pocket, as compared to accruals of income or expense which are legally-enforceable obligations but which are not immediately due or payable.

D

Default: A default occurs upon the breach of a term of a loan agreement. The most frequent default is a failure to make a loan payment. Usually the loan instrument will give the creditor the right to accelerate the loan, that is, demand payment of the whole loan. If the loan is not paid off in full, and the loan is secured, then repossession or foreclosure can go forward against the collateral.

Discharge: In bankruptcy, discharge refers to the release from personal liability for the debtor from the specific debt subject to discharge.

Distribution: A tax law term referring to a deemed receipt of income by the taxpayer/debtor after failing to pay back a loan from a retirement account.

E

Exempt: In bankruptcy, an exempt asset is one which is not available to the trustee or creditors for liquidation and subsequent distribution toward the repayment of debts. Under federal bankruptcy law, each state is free to adopt its own schedule of exemptions for property, the standard federal schedule, or offer debtors an option to choose either.

Equity: For bankruptcy purposes, this is generally the profit available in an asset after paying off loans and liens against the property. Nonexempt equity is that part of the profit that is not protected by bankruptcy exemptions.

F

Foreclosure: The process by which a creditor enforces a secured debt through public auction of the collateral, usually real estate.

Fraud: For the lay person, this term is basically equivalent to a lie. In bankruptcy, loans taken out by a debtor with the intention never to repay are subject to objection barring discharge against the creditor for fraud.

G

Garnishments: Court order to an employer to withhold from the debtor/employee's wages and remit part of the wages to the creditor in payment of the debt. Private debtors must go to court first and obtain a judgment before proceeding to garnish. The IRS does not have to go to court and can proceed directly.

I

Impair: A proposal in a Chapter 11 plan to alter the legal, equitable, or contractual rights of the holder of a claim or interest, such as by changing the interest rate or amount of the debt.

Installment agreement: Agreement with the IRS to pay a tax debt, with interest, over time with payment based upon the debtor's excess monthly income.

J

Joint tenancy by the entirety: A form of legal ownership by a husband and wife. For bankruptcy purposes, its importance relates to the fact that generally whatever equity (profit) exists in the property, such as a house, is protected from creditors who have a debt with only one of the spouses (but not a joint debt of both).

L

Liens: A claim against property to secure a debt. The lien can come into existence by voluntary agreement of the debtor and creditor or by law.

"Lift stay" motion: A motion by a lender asking the court to remove property of the debtor from the protection of the bankruptcy court so it can proceed to foreclose or repossess its collateral.

Liquidation: A process by which all assets of a debtor (individual or business) are gathered up, sold, and the proceeds used to pay off the creditors to the extent funds are available. In bankruptcy, the creditors are paid in order of priority set by the bankruptcy code and, in the reorganization chapters of 13 and 11, according to the plan of liquidation proposed and confirmed by the court.

O

Offer in Compromise: An IRS program available to taxpayers to settle tax debts for less than the full amount owed to the government. The program is based upon a delegation of such authority by Congress to the IRS, but does not obligate the IRS to settle.

P

Plan: A proposal presented in the bankruptcy reorganization Chapters of 13 and 11 whereby the debtor's finances are restructured through a combination of actions, including reducing or eliminating some debts, modifying the terms and amounts of some loans, and/or rejecting or assuming current leases and contracts, with the goal of increasing monthly "cash flow" and making the debtor's financial situation workable going forward.

Predatory loans: Loans to homeowners made under particularly onerous terms such that foreclosure is highly likely. Some jurisdictions have passed legislation to regulate and bar such loans from being made.

Priority taxes: Generally, income taxes that have become legally due and payable within the three years prior to filing bankruptcy. Priority taxes must be provided for payment in full in the debtor's Chapter 13 plan to be confirmable by the court.

Proof of claim: Basically, the creditor's "invoice" to the court as to the type, and amount, of debt to which the creditor believes it is entitled where there are assets to be distributed under the bankruptcy filed by the debtor.

R

Reaffirm: Term referring to a debtor's taking back into personal liability a debt that could have been discharged in bankruptcy. The act is usually done in writing.

Redemption: Debtor's right to buy, usually in a lump sum, collateral secured by a debt at the present value of that collateral.

Reorganization: A process in bankruptcy by which the finances of a debtor are restructured through a variety of actions including modifying secured loans, discharging or paying selected unsecured debts, rejecting or assuming leases, and selling selected assets. The restructuring plan must meet bankruptcy law requirements and be approved by the court (and in Chapter 11 by the creditor as well).

S

Secured: Generally, a secured debt is one which is backed by collateral.

Surrender: A debtor's right to return collateral to a creditor. Since personal liability is discharged on the debt and the lien attaches to the property, surrender of the collateral to the lender removes all obligations from the debtor.

Strip off: Process in bankruptcy by which a secured debt, often a 2nd mortgage for which there is not sufficient value in the house to fully secure it, is converted to an unsecured debt and the security agreement cancelled when the discharge is granted.

T

Tax lien: Claim placed upon property to secure a tax debt. The lien arises automatically when the tax debt comes into existence and attaches to almost all property the debtor owns now and in the future (if the debt is not paid). A Notice of Federal Tax Lien, usually recorded in the county records, puts the public on notice and will make sale or refinance of the property difficult as the claim will follow the buyer or mortgage company that took the property as collateral.

Trustee: a private attorney appointed by the court to administer the bankruptcy case for the benefit of the creditors.

U

Undue hardship: Legal standard that must be met by the debtor to obtain discharge of a student loan. Basically the debtor must show that he will not be able to maintain a minimal living standard, that this financial situation will continue for a significant time during the repayment period, and he has made a good faith effort to repay. In practice, few cases meet the standards.

Unsecured: Debts that are not supported by collateral, the most typical being credit card debts and unpaid bills.

US Trustee. A division of the Department of Justice whose staff and attorney's job is to oversee the integrity of the bankruptcy system.