Common Bankruptcy Terms


Automatic stay

The automatic stay is a feature of bankruptcy law that goes into effect immediately upon filing a bankruptcy petition. The automatic stay forces creditors to stop all collection actions (like foreclosures, repossessions, garnishments, and evictions) against the debtor, so that collection and distribution of assets can occur according to a fair and orderly method as specified in the Bankruptcy Code, rather than according to which creditors might be the quickest or most aggressive or have an “in” with the debtor.

Chapter 7

A Chapter 7 bankruptcy permits the debtor to liquidate assets in an orderly way. In Chapter 7 (also known as “straight” bankruptcy), a trustee is appointed. The trustee collects all nonexempt assets of the debtor, sells those assets, and distributes the proceeds to creditors. There is no minimum or maximum debt limitation for Chapter 7, and the debtor doesn't have to be insolvent. The goal of an individual debtor in a Chapter 7 case is to get a “discharge” of his or her debts.

Chapter 11

A Chapter 11 bankruptcy permits the debtor to restructure or reorganize debt while carrying on, albeit in a significantly circumscribed way, their business and/or financial affairs. Individuals as well as businesses may use Chapter 11, but individuals who do so usually operate some kind of business. A trustee is usually not appointed in a Chapter 11 case. Rather, the debtor is allowed to continue to manage his or her business. Chapter 11 recognizes that there is often greater economic and/or social value in keeping a going concern going than in liquidating it, distributing what assets it has, terminating its commercial relationships, and letting its employees go.

The debtor develops a “plan” which outlines how his or her debts will be repaid. Usually, a debtor filing a Chapter 11 does not plan on “liquidating” assets, rather in most cases the debtor plans on reorganizing debts so that he or she can continue to operate, hopefully on a profitable basis. Individuals operating businesses usually file under Chapter 11 when they are facing a cash flow shortage or temporary downturn in business. Upon confirmation (court and creditor approval of its plan of reorganization), a Chapter 11 debtor receives a discharge of any debt that arose before confirmation.

Chapter 13

Individual debtors who have a regular income (including those engaged in business) can file a Chapter 13 bankruptcy to restructure or reorganize debt. A debtor “engaged in business” is someone who is self-employed and incurs trade credit in the production of income from that employment. A debtor engaged in business may continue to operate his or her business in a Chapter 13 case. Like a Chapter 11, the debtor proposes a plan that outlines how his or her debts will be repaid. The debtor must devote all of his or her disposable income to payments under the plan for three to five years. To qualify for Chapter 13, a debtor must have: a regular income; unsecured debts of less than $290,525; and secured debts of less than $871,550. A trustee is appointed in all Chapter 13 cases, but the trustee's role is much more limited than in a Chapter 7 case. The small business debtor is allowed to continue his or her business. In Chapter 13 cases, a debtor receives a discharge when the debtor has completed all payments under the plan.


Generally, a discharge in bankruptcy means that an individual debtor's obligations are erased or wiped out. When a discharge is granted, it protects the debtor from personal liability on the discharged debt. A discharge is only available to certain debtors and for certain debts, however. For example, debtors that are not individuals cannot receive a discharge in a Chapter 7 bankruptcy.


Individual debtors are entitled to keep certain assets free from the claims of creditors, under federal or state exemption laws. Typical exemptions are the homestead exemption (equity in the debtor's personal residence), cash value of insurance policies, household goods and furnishings, clothing, wages, and tools used in the debtor's job. Different states exempt different types of property and have different maximum dollar amounts. The amount of the exemption depends on whether federal or state exemptions are available and/or used.

Fraudulent transfer

A fraudulent transfer is a transfer made by a debtor with the intent or effect of reducing the assets available to creditors. For instance a debtor might attempt to repay a loan to a friend or family member when those funds ought rightfully to be divided between all the debtor's creditors. Fraudulent transfer law exists both in and outside of bankruptcy. A trustee has the power to undo or nullify (“avoid”) transfers of the debtor made with actual intent to hinder, delay, or defraud creditors, and certain transfers for which the debtor did not receive a reasonably equivalent value in exchange for the transfer.


A preference is a payment received from a debtor by a creditor in the ninety days before the debtor's bankruptcy filing. The trustee can recover such a payment if:

  1. the debtor made the payment within ninety days of filing bankruptcy;
  2. the payment was made to or for the benefit of a creditor on a pre-existing debt, and
  3. the debtor was insolvent when it made the payment.

There are various defenses to a preference action by the trustee, including that the payment was made in the ordinary course of the debtor's business.

Relief from the automatic stay

Although the automatic stay prohibits collection of debts by a creditor – including secured creditors – a secured creditor can ask the bankruptcy court for “relief” from the automatic stay. There are three bases on which a creditor might be entitled to relief from the automatic stay. First, for “cause.” Usually cause exists where the creditor can establish that it otherwise would not have adequate protection. Second, if a creditor wants relief from stay related to an act against property, the creditor must show that the debtor does not have equity in the property and that the property is not necessary to an effective reorganization. Third, a creditor is entitled to relief if its claim is secured by “single asset real estate,” unless the debtor files a plan that is likely to be confirmed or the debtor makes monthly payments to the creditor equal to interest at current fair market value on the balance of the creditor's interest in the real estate.


Actually there are several types of bankruptcy trustees:

The United States Trustee is responsible for oversight of the bankruptcy process as a whole. The United States Trustee's duties are to maintain and supervise a panel of private trustees (usually, but not always, private attorneys) to serve in Chapter 7 cases, review fee applications filed in Chapter 11 cases, monitor plans and disclosure statements in Chapter 11 cases, monitor activities of creditors' committees, monitor the progress of Chapter 11 cases, and assist the United States Attorney in criminal prosecutions.

The United States Trustee appoints the trustee in a Chapter 7 case from a panel of private trustees. A Chapter 7 trustee is responsible for representing the interests of the debtor's estate and creditors as a whole.

In a Chapter 13 case, a “standing” trustee is appointed by the United States Trustee to conduct the duties of the United States Trustee in Chapter 13 cases.

Involuntary bankruptcy

In some cases, creditors may file a petition to force a debtor into bankruptcy against the debtor's will, so to obtain some benefit from the distribution of the debtor's assets or proceeds. To commence an involuntary Chapter 7 or a Chapter 11 case, the creditors must meet certain threshold requirements pertaining to their number and the amount of debt owed them by the debtor.

Voluntary bankruptcy

A debtor files a petition to commence a voluntary bankruptcy.

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