Topic Cluster

Bankruptcy Terms

19 terms

Bankruptcy is a federal legal process that gives individuals overwhelmed by debt a path to either eliminate most obligations (Chapter 7) or restructure payments into a manageable plan (Chapter 13). For homeowners, bankruptcy's most powerful tool is the automatic stay — an immediate court order that halts all collection activity, including foreclosure, the moment a petition is filed.

Understanding bankruptcy terminology matters because timing decisions — Chapter 7 vs. 13, when to file relative to a foreclosure sale, whether to reaffirm a mortgage — have consequences that last 7-10 years. The American Distress Index tracks bankruptcy filing rates through its legal filings indicators, and the current national filing rate serves as a lagging measure of distress that peaked in 2005-2010 and is now slowly rising again.

Chapter 7 vs. Chapter 13

Feature Chapter 7 (Liquidation) Chapter 13 (Repayment Plan)
Duration 3-6 months 3-5 year repayment plan
Keeps home? Only if current on payments + within exemption Yes — can cure arrears through plan
Means test Income must be below state median (or pass expense test) No income cap, but must have regular income
Credit impact Stays on report 10 years Stays on report 7 years
Completion rate ~95% receive discharge ~40% complete the plan

See Bankruptcy Guide for a complete walkthrough, or Bankruptcy Statistics for current filing trends.

Terms in This Cluster

Adversary Proceeding A formal lawsuit within a bankruptcy case used to resolve disputes like fraud claims, lien avoidance, and challenges to debt discharge. Automatic Stay A court order that immediately stops foreclosure, debt collection, and lawsuits the moment you file for bankruptcy. Bankruptcy Estate All property and legal interests a debtor owns at the moment of bankruptcy filing, which the trustee administers to pay creditors. Bankruptcy Trustee A court-appointed official who administers bankruptcy cases — liquidating assets in Chapter 7 or overseeing repayment plans in Chapter 13. Chapter 11 Bankruptcy A bankruptcy reorganization process primarily for businesses that allows them to restructure debts while continuing operations. Chapter 12 Bankruptcy A specialized bankruptcy reorganization exclusively for family farmers and fishermen to restructure debts while keeping their operations running. Chapter 13 Bankruptcy A bankruptcy that lets you catch up on missed mortgage payments over 3-5 years while keeping your home. Stops foreclosure immediately. Chapter 7 Bankruptcy A bankruptcy that wipes out most unsecured debts in 3-4 months. You must pass the means test to qualify. Creditor Meeting (341 Meeting) A mandatory bankruptcy hearing where the debtor answers questions under oath from the trustee and creditors. Most last under 10 minutes. Discharge A court order that permanently eliminates your legal obligation to pay certain debts at the end of a successful bankruptcy case. Fraudulent Transfer A transfer of property made to cheat creditors or made for less than fair value while insolvent. Trustees can reverse these in bankruptcy. Means Test An income test that determines if you qualify for Chapter 7 bankruptcy by comparing your income to your state's median. Preference Payment A payment to a creditor before bankruptcy that gives them more than they'd get in liquidation. Trustees can claw back these payments. Priority Debt Debts that must be paid before other unsecured creditors in bankruptcy, including recent taxes, child support, and employee wages. Proof of Claim A formal filing by a creditor in bankruptcy asserting the right to payment from the estate, detailing the amount and type of debt owed. Reaffirmation A voluntary agreement to remain responsible for a specific debt after bankruptcy — usually to keep property like a car. Must be approved by the court. Secured Creditor A creditor whose debt is backed by collateral (like a home or car) that can be seized if the borrower defaults. Stay Relief (Relief from Automatic Stay) A court order lifting the automatic stay for a specific creditor, allowing them to resume foreclosure or repossession during bankruptcy. Unsecured Creditor A creditor whose debt is not backed by collateral. Includes credit cards, medical bills, and personal loans — paid last in bankruptcy.

Related Topics

Foreclosure Terms Bankruptcy can halt foreclosure Debt Collection Terms How bankruptcy affects collections Loss Mitigation Terms Alternatives before bankruptcy
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