Assets: Property owned by an individual that is regarded as having value.
Bankruptcy Petition: A collection of forms that are submitted to officially open a bankruptcy case. Blank forms are available here.
Chapter 7 Bankruptcy: Chapter 7 is the most common form of bankruptcy, which can be filed by consumers or businesses. All assets that qualify as nonexempt are relinquished to a trustee, who will then use the assets to pay creditors. The portion of debt remaining after this liquidation process will be discharged.
An individual should consider Chapter 7 if any of these apply: there is no hope of repaying any of the debts, the debts were not cosigned, they are about to be sued by creditors or they need to protect exempt property as well as exempt income.
Chapter 11: Chapter 11 is a risky, expensive and time-consuming venture. For this reason, consumers rarely file unless their debts exceed the statutory limits of a Chapter 13 Bankruptcy and it is most often only used by corporations. It allows the debtor to reorganize their finances, which are approved by a bankruptcy court.
Chapter 12: To be eligible for Chapter 12, at least 80% of present debt must have accrued from a family farm or family fishing business. The owner stills retains control of their assets and creates a payment plan to repay the accrued debt. The guidelines are almost identical to those in Chapter 13.
Chapter 13: Individuals typically file for Chapter 13 if their income is too high to meet the Chapter 7 guidelines or if they wish to protect assets and do not want to hand them over to creditors. If your income is not regular or if it is too low, you will not qualify because you will be unable to make the scheduled payments.
Chapter 13 bankruptcy does not require an individual to give up any of their property. Instead, a repayment plan is created, which details when each debt will be paid and how.
An individual should consider Chapter 13 any of these apply: if they have already filed for Chapter 7 within the past eight years, the debts can be paid within five years, debts are held with cosigners, one’s income is too high in order to qualify for Chapter 7, or if one is behind on mortgages and back taxes.
Cram Downs: An individual can cram down certain secured debts, such as car loans, investment mortgages or other personal property (other than real estate). Bankruptcy courts are able to modify loan terms that are subject to certain conditions in an attempt to have all parties come out better than without the modifications. This can reduce interest rates and extend the payments over a longer period to create lower monthly payments.
Creditor: A person or company that money is owed to.
Disposable Income: Income that remains after paying all necessary bills, priority debts and secured debts.
Exempt Property: These are considered items that are necessary for living and working; therefore, they will not be taken to pay off debts. Exempt property includes: motor vehicles (up to a specific value), household appliances, necessary clothing, jewelry (up to a specific value), necessary household goods and furnishings, household appliances, pensions, a portion of the debtor’s home equity, tools of the debtor’s profession, accumulation of public benefits in bank accounts (social security, welfare, unemployment) as well as a portion of unpaid but earned wages.
Liquidation: “Liquidity” is a term used in reference to how quickly assets can be turned into cash. Chapter 7 bankruptcy is a liquidation process because it is designed to convert a debtor’s property into cash that can immediately pay off debts.
Means Test: This test requires individuals who can afford to pay off a portion of their debts to enter into a repayment plan, rather than discharging all their debts, such as in Chapter 7. If one passes the means test, they can then file for Chapter 7 bankruptcy. However, if one does not pass the means test, they will be limited to Chapter 13 bankruptcy.
Modification Attorney: A modification attorney specializes in foreclosures. Such lawyers will assist an individual to avoid foreclosure by creating a loan modification plan.
Nondischargable Debts: These are debts that cannot be taken out of the estate to be used for repayment of debt. They include: taxes, tax liens, alimony, child support, student loans, debts for fraud, debts for malicious injury, fines from the government, debts for judgments in wrongful death or personal injury, student loans, as well as unscheduled debts.
Nonexempt Property: Non-exempt property consists of items that fall outside of the necessities for living and working. Therefore, these can be taken to pay off debts. These include: expensive musical instruments, collectibles, family heirlooms, certain bank accounts, second or vacation homes and second cars.
Priority Debts: Debts that must be paid in full. These debts will be listed first in the repayment plan because they are the most important and should be paid off immediately. These debts include alimony, child support, wages paid to employees and some tax obligations.
Repayment Plan: The repayment plan details when and how each debt will be paid. The plan ranges from three to five years and is comprised of three types of debt: priority debts, secured debts and unsecured debts. These are detailed below.
Secured Debts: Debts that have a contract, which detail a specific payment amount and schedule. This would include debts such as car loans and mortgages.
Strip Offs: A tool that allows individuals who have a mortgage that exceeds the value of their home to get rid of junior liens, such as, second or third mortgages. The bankruptcy court takes the second or third mortgage and converts it to an unsecured debt.
Trustee: An impartial individual that is appointed to oversee an individuals’ bankruptcy case. A trustee will review the bankruptcy petition and verify the information within it. The trustee is also responsible for selling all nonexempt assets and distributing the money to creditors. Once an individual files for bankruptcy, they can no longer pay creditors directly and must have a trustee do so.
Unsecured Debts: Debtors need to use disposable income to repay a portion of unsecured debts. Unsecured debts are ones that do not have property as collateral, such as with a mortgage and a house. These are debts such as medical bills and credit cards. Unsecured debts do not need to be paid in full (sometimes, not at all), but there must be an attempt to pay some of what is owed.