Glossary of Bankruptcy Terms

Glossary of Bankruptcy Terms

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Chapter 7 bankruptcy cases come with their own vocabulary. Understanding the terms used during and in relation to Chapter 7 bankruptcy cases can help you get a better idea of what bankruptcy is all about.

For even more information about Chapter 7 bankruptcy, talk with a bankruptcy lawyer. Call 877-226-6844 or fill out our free bankruptcy case evaluation form, and we’ll connect you with a bankruptcy attorney in your area right away.

Chapter 7 Bankruptcy Glossary


Abusive Overdraft Loan: short-term, high-interest loans of small dollar amounts made by banks to customers who overdraw their accounts.

For many banks, abusive overdraft loans are the norm; some banks offer this “service” automatically.

Adjustable Rate Mortgage (ARM): a home loan whose monthly payment fluctuates, or “adjusts” each month. Often contrasted with the fixed rate mortgage, whose payments are constant each month.

ARMs became popular during the real estate boom of a few years ago. Because of the “innovative” terms of some adjustable mortgages, many Americans are now facing foreclosure.

Asset: any property of value owned by a person or entity.

During Chapter 7 bankruptcy cases, the bankruptcy trustee may liquidate (convert to cash) a filer’s non-exempt assets and repay creditors with the money.

Automatic Stay: a protection offered to bankruptcy petitioners. As soon as a bankruptcy case is filed, the automatic stay protects filers from most collection actions, including lawsuits, repossession, debt collection, garnishment and foreclosure.

Bankruptcy: the legal announcement that an individual or organization is unable to repay creditors. The U.S. Bankruptcy Code offers several versions of bankruptcy, so that people and entities with various financial struggles may all have access to a fresh financial start.

If Chapter 7 bankruptcy turns out to be inappropriate for your financial situation, you may be able to find relief with Chapter 13 bankruptcy.

Bankruptcy Petition: the paperwork required to file with the bankruptcy court in order to officially begin a bankruptcy case.

Those who file for Chapter 7 bankruptcy and those who file for Chapter 13 bankruptcy will experience different events after the filing of the initial bankruptcy petition.

Bankruptcy Trustee: the person, appointed by the creditors in a bankruptcy case or by the United States Justice Department, who oversees the happenings of a bankruptcy case.

One of the trustee’s roles in Chapter 7 bankruptcy cases is to gather, liquidate and distribute non-exempt property.

BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005): the revision of U.S. bankruptcy law passed in October, 2005. For Chapter 7 petitioners, BAPCPA introduced a qualifying “means test.”

BAPCPA mandates that all bankruptcy filers complete Credit Counseling and Debtor Education classes before receiving a bankruptcy discharge.

Chapter 7 Bankruptcy:sometimes called “liquidation,” this type of personal bankruptcy discharges, or excuses, filers from many unsecured debts.

Chapter 7 bankruptcy is sometimes called “liquidation” because a bankruptcy trustee can liquidate, or convert to cash, a filer’s non-exempt assets, to pay creditors.

Chapter 13 Bankruptcy: sometimes called “reorganization,” this type of personal bankruptcy allows petitioners to work within a three- to five-year repayment plan to get current on their obligations to creditors.

Chapter 13 filers are often able to keep their cars or homes and have a chance to catch up on debts.

Collateral: an asset offered as security for a loan.

A house is the collateral in a mortgage loan: if the borrower doesn’t adhere to the terms of the loan, the lender can seize the house. The borrower’s incentive to keep making payments is continuing to live in the house.

Cosigner: a person who literally signs loan papers along with the primary borrower. If the primary borrower defaults on a loan, the co-signer is legally responsible for making necessary payments.

Those rebuilding credit after a bankruptcy may qualify for more favorable loan terms by working with a cosigner who has a solid credit history.

Credit Counseling Briefing: the “ticket in” to the bankruptcy process, this must be completed before a court will accept a bankruptcy petition. You can complete a credit counseling briefing in person, over the phone or on the Internet.

Cases filed without proof that the petitioner has completed the credit counseling requirement may be thrown out by a judge.

Credit Report: documentation of your credit history, including payment history on various credit sources (mortgages, rent, car loans, credit cards, etc.), current status of accounts and more.

Thanks to the Fair Credit Reporting Act of 2003, all Americans are entitled to one free credit report per year from each of the three major credit reporting agencies (Experian, TransUnion and Equifax).

Credit Reporting Agency (Credit Bureau): a company that offers credit reports. These agencies collect, document and report credit information for Americans.

To receive your free credit report from a Credit Reporting Agency, visit

Credit Score: a number from 300 – 850 that helps lenders to gauge an individual’s risk level. Higher credit scores translate to greater likelihood of repaying a loan, basically.

Credit scores below a certain point are considered “subprime,” and are viewed as high lending risks. Higher scores are considered “prime,” and usually qualify borrowers for more attractive loan terms.

Creditor:a person or entity to whom a debtor owes money.

Chapter 7 bankruptcy is designed to satisfy your obligations to creditors tied to unsecure debts. During the repayment portion of Chapter 13 bankruptcy cases, petitioners pay off most of their obligations to creditors during a court-approved repayment timetable.

Debtor: someone who owes money to a creditor.

For some debtors, bankruptcy is the only viable option for eliminating their debt.

Debtor Education Course: the “ticket out” of bankruptcy. The debtor education course is a requirement for all bankruptcy petitioners who wish to receive a discharge from the bankruptcy court.

The practical skills taught in the debtor education course are meant to be useful to petitioners in their post-bankruptcy life. Concepts covered include money handling, debt management and more.

Default: failure to meet financial obligations. Also, the state of a loan that hasn’t been paid: after missing a given number of loan payments, you will default on your loan and your loan will be in default.

A lender can begin collection actions (foreclosure, garnishment, repossession, etc.) on a loan that goes into default.

Discharge: 1. The elimination of debt. In Chapter 7 cases, a bankruptcy judge can discharge, or excuse, some or all of your unsecured debts.

2. Departure from bankruptcy. After completing the requirements of the bankruptcy court, you can receive your bankruptcy discharge. Once you receive your bankruptcy discharge, all debts handled in your case will be considered closed.


A debt that may be forgiven during your bankruptcy case. A debtor is no longer obligated to pay dischargeable debts that are forgiven by the bankruptcy court.

Equity: the value of an asset aside from anything owed on it (liens, mortgages, etc.).

After making mortgage payments for several years, many homeowners have equity in their houses. An asset has equity if you could sell it for more than it would cost you to pay off any debts you owe on it.


Chapter 7 exemptions are designed to protect certain types and amounts of property from sale when you file Chapter 7 bankruptcy. Exemptions vary from state to state, but generally include a home, work tools and some personal property, like household furnishings and clothes.

These bankruptcy exemptions are the reason why there is no sale of any property in most Chapter 7 bankruptcy cases. Most people eligible to file do not own any non-exempt property.

FICO Score: the credit score, as calculated by the Fair Isaac Corporation. This is the score lenders use most commonly when determining a borrower’s risk level.

Your FICO score is between 300 and 850. Having a higher score will probably qualify you for attractive loan terms, while having a lower score may impede you from getting loans.

Fixed Rate Mortgage: a home loan that requires borrowers to pay a constant (“fixed”) rate throughout the life of a loan (usually about 30 years). Contrast with “adjustable rate mortgage.”

Current turmoil in the housing market has been partly attributed by lenders offering too few fixed rate mortgages and too many irresponsible adjustable rate mortgages, which led to massive borrower defaults.

Foreclosure (Mortgage Foreclosure):the repossession of a home by a mortgage lender. If a borrower deviates from the terms of the mortgage agreement by failing to make payments, a lender can foreclose on a property.

After a roaring boom period, the U.S. housing market has plunged into a slump characterized by massive mortgage defaults and foreclosures.

Garnishment: a type of collection that allows debt collectors to pay a debtor’s wages directly to a creditor.

Chapter 7 bankruptcy automatic stay is designed to halt all collection efforts – including garnishment – as soon as the petition is filed, in most cases.

Identity Theft: the information crime of using another person’s identification information (including SSN, credit card numbers, etc.) to complete financial transactions fraudulently.

Regular checks of your credit report allow you to verify the status of your identity and personal information.

Insolvency: see “bankruptcy.”

Lien: a claim on a piece of property as an exchange for a debt.

Car loans and house mortgages are both examples of voluntary liens: the borrower agrees that he will surrender his property if he fails to make payments. An involuntary lien results from a judge’s ruling that a debtor must surrender property to a creditor (e.g. in a lawsuit).

Liquidation: the conversion of an asset to cash (usually by selling it).

During a Chapter 7 bankruptcy case, a trustee can liquidate any non-exempt assets a filer has and use the money to pay creditors. If you don’t have any non-exempt assets, as is the case with many Chapter 7 filers, little or no liquidation will occur.

Mass Layoffs: a large-scale letting go of employees from a single company or organization.

Mass layoffs usually result from financial reorganization or difficulty.

Means Test: Everyone interested in filing for Chapter 7 bankruptcy has had to pass a test of means (financial ability).

The means test requires you to compare your income with that of other families of your size in your area.

Medical Bankruptcy: financial hardship from medical expenses that leads you to file for bankruptcy.

Research has shown that as many as half of all bankruptcies in the U.S. can be attributed at least in part to medical expenses, making them the second most common causal factor of bankruptcy filings.

Medical debt is considered unsecured debt and may be addressed in a Chapter 7 bankruptcy filing.

Mortgage: a loan (or promise to pay) secured by real estate. You risk losing your real estate (usually a home) if you don’t follow the terms of the loan.

Mortgage loans are common for homebuyers, since few people can afford to pay cash for a house.

Non-Dischargeable: unable to be excused by a court of law.

Student loans, tax debts and child support debts are some examples of loans that are generally considered non-dischargeable in bankruptcy court.

Payday Loan: short-term, high-interest loans for relatively small dollar amounts marketed to those who are unable to get loans from mainstream lenders like banks.

Payday loans can lead to a ruinous debt cycle and can carry annual interest rates up to 390 percent. Many states have begun to take legislative action against payday lending stores.

Debt related to payday loans is considered unsecured debt and may be included in a Chapter 7 bankruptcy filing.

Predatory Lending: while no legal definition for predatory lending exists, the term has been used to describe lending practices that involve deceit. Examples include lying about the terms of a loan, talking a borrower into less favorable terms than he qualifies for, etc.

Legislators have named subprime mortgages, abuse overdraft loans, some credit cards and payday loans as examples of predatory loans.

Repossession: when a creditor reclaims ownership of property because a borrower fails to make payments.

Foreclosure is the repossession of a house; like all collection actions, repossession may be halted by bankruptcy’s automatic stay.

Schedules: the papers filed with the bankruptcy court that contain the details of a filer’s debts, assets and income.

After filing your bankruptcy petition, your lawyer will file schedules and other appropriate documents.

Secured Debt: a debt secured by material goods or collateral.

Car loans are secured debt backed by an automobile. Lenders can reduce risk by securitizing loans – a borrower who doesn’t adhere to the terms of a loan stands to lose the collateral, and so has greater incentive to pay.

Learn more about Chapter 7 bankruptcy and your car.

Subprime Loan: a loan offered to someone whose credit score is low or credit history is shaky. Subprime loans come with more expensive terms (e.g. higher interest rates) than prime loans, since they present a bigger risk for the lender.

Subprime loans can serve to get real estate to low-income Americans, but they were largely abused during the housing boom, and are now proving disastrous investments for many.

Unsecured Debt: a debt not secured by material goods (collateral).

Most credit card debt is unsecured – creditors cannot reclaim any property for those who do not pay. Creditors may sue to reclaim unpaid unsecured debt.

United States Bankruptcy Code: the collection of laws and regulations that determine the workings of bankruptcy courts in the U.S.

Click here to view the full U.S. Bankruptcy Code. Learn more about Chapter 7 bankruptcy laws.