Bankruptcy’s Secret Language
An individual can become confused by certain terms used during a bankruptcy case. Today’s article will help explain some of these confusing terms in plain language:
Bankruptcy Estate – consists of all of the debtor’s legal or equitable interests in property at the time the bankruptcy case is filed.
Means Test –a calculation of the debtor’s income and expenses to determine the ability to pay creditors. A debtor who fails the Means Test is presumptively disqualified from filing a Chapter 7 bankruptcy case and must file either under Chapter 13 or 11. Sometimes passing the Means Test is a matter of a few simple adjustments.
No-Asset Case – a Chapter 7 case where there are no assets or funds to pay unsecured creditors
Nondischargeable Debt –a debt that is not included in the bankruptcy discharge, usually a type of debt identified by law (e.g. child support, certain taxes, etc.)
Petition –refers to the papers filed with the court that commences the bankruptcy case. The date the bankruptcy was filed is often called the Petition Date.
Pre-Petition / Post-Petition – identifies the time of a bankruptcy-related activity. For instance, a debt that was incurred prior to the bankruptcy filing date is a “pre-petition” debt. Income earned after the date of the bankruptcy filing is called “post-petition” income.
Preference –a debt that was paid prior to the bankruptcy when the debtor was insolvent and unable to pay other creditors. Preference payments should be avoided. Discuss any pre-bankruptcy payments with your attorney.
Proof of claim – the creditor’s claim and verification of a debt filed during a Chapter 11, 13, or Chapter 7 asset case.
Secured Debt – a secured debt is backed by a mortgage, pledge of collateral, or other lien. If the debt is not paid, the debtor has a right to collect against specific property. For instance, a car loan may pledge the car as collateral for the loan. If the borrower fails to make the payments, the lender can repossess the car. Common secured debts are auto loans, mortgages, and personal loans secured by household items.
Trustee – the individual assigned to administer the bankruptcy case. Usually an accountant or attorney, the trustee is not the bankruptcy judge.
Unsecured Debt – an unsecured debt is not secured by property. A signature loan, most credit cards, and medical bills are common types of unsecured debts.