Filing for bankruptcy can be a confusing process full of many terms and words you may not have heard before. Preparation is always important when it comes to making big decisions, especially when the decisions are about your money. Understanding some of the more common terms can make the process of filing for bankruptcy much easier.
Bankruptcy- the legal procedure for managing debt problems of individuals and businesses
Bankruptcy petition-the legal document that is filed with the court to initiate a bankruptcy proceeding. This document provides details about your debts, assets and an overview of your financial history.
Automatic Stay-the legal action that prohibits creditors from collecting on a debt in bankruptcy. Once the bankruptcy petition is filed, creditors are not allowed to make any further collection attempts on the debt listed in the bankruptcy proceeding. This protection does not extend to debts that are not part of the bankruptcy case.
Means Test-is a test that determines your financial eligibility for bankruptcy. If your income is above a specified amount you may not qualify for bankruptcy protection. In some cases, you may qualify for a reorganization of your debts through a Chapter 13 plan but not debt elimination through Chapter 7 bankruptcy.
Exemption-is legal protection of an asset from seizure or liquidation by creditors. Many of your assets are protected from liquidation during bankruptcy, including your homestead. States vary on the amount and type of personal property that is exempt during bankruptcy.
Trustee- is the court appointed representative over your bankruptcy case. The trustee is responsible for paying creditors, collecting and distributing assets when applicable and monitoring repayment plans. It is important to remember that the Trustee acts as a mediator between you and the creditor.
Secured debt- is a debt that is secured against collateral. These debts have placed one of your assets up against the loan in the event you default on the debt payment. If you default on the loan payment, the creditor has the right to seize and liquidate your asset in order to satisfy the debt owed. Mortgage loans, car loans, payday loans and some personal loans are examples of secured debts.
Unsecured debt- is a debt that is not secured against collateral. They are called “unsecured” because the creditor has no right to your assets in the event you default on the debt payment. Credit cards, medical bills, some personal loans, and utility bills are examples of unsecured debts.
Discharge-refers to the satisfaction or elimination of your debts, as approved by the bankruptcy court. If you receive a discharge of your debts, you are released from liability of those debts and the creditors must acknowledge your debt has been satisfied. Creditors cannot attempt to collect on any debts that have been discharged in bankruptcy.
Dismissal-refers to the termination of your bankruptcy case, as ruled by the court. If you receive a bankruptcy dismissal, you are not released of liability of your debts and your debts have not been satisfied or eliminated. After a bankruptcy dismissal you will be responsible for repaying those debts to creditors; unless you qualify to re-file for bankruptcy. Your case can be dismissed for many reasons such as, your income level is sufficient to repay your debts and you do not qualify for bankruptcy protection, an act of bankruptcy fraud or failure to comply with the bankruptcy process.