12 Terms You Should Know When Dealing With a Bankruptcy

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All week we have been covering bankruptcy and most recently covered what the different chapters are in filing for bankruptcy. Understanding how a bankruptcy works can be pretty difficult especially with all those big words that are thrown around. Now that we know how Chapter 7 differs from Chapter 13 bankruptcy, for example, let’s take a look at a few more terms in understanding bankruptcy. To review, a bankruptcy is a federally authorized procedure where a debtor is legally relieved of total liability for its debts by making court-approved arrangements for their partial repayment. A debtor may be an individual, corporation, or municipality.

Below are a few terms you may not have heard of before, but should be familiar with. Keep in mind their meanings are in relation to bankruptcy, as they may have more than one meaning under different circumstances.

Affirmation- An agreement by a debtor to continue paying certain dischargeable debts after bankruptcy.

Automatic Stay- An injunction that stops foreclosures, lawsuits, garnishments, and all other collection activity against a debtor. This is usually enforced as soon as a bankruptcy petition is filed.

Bankruptcy Trustee- A private individual or corporation that’s assigned in to a bankruptcy case.  Their main duties are to represent the interests of the bankruptcy estate and the creditors of the debtor. Trustee duties may differ slightly, depending on the type of bankruptcy.

Exemptions- Exemptions in a bankruptcy are properties that you get to keep. An exemption is a set of laws protecting certain properties from liquidation or seizures by creditors. They play a major role in Chapter 7 and Chapter 13 bankruptcies, and there are different exemptions under federal and state laws.

Fiduciary- A party that’s responsible for managing someone else’s assets. A “party” can be an individual, company, or association. Fiduciaries may include executors of wills and estates, trustees, and receivers in a bankruptcy.

Financial Insolvency- When an organization or individual can no longer meet its financial obligations with its lender(s) to pay off debts. Insolvency usually leads to insolvency proceedings to determine the steps in moving forward.

Liquidation-This may occur when a business or individual is terminated or goes bankrupt. Assets are sold and the funds from those assets are given to the creditors to which the debtor owes. For businesses, any funds that remain are distributed to shareholders in the company.

The Means Test- This is an investigation into an individual’s financial state, to determine eligibility for Chapter 7 bankruptcy. Specific expenses and secured debt payments are deducted from your current monthly income to give you the disposable monthly income amount. If it is less than $100, you are eligible for Chapter 7 bankruptcy.

Municipality Bankruptcy- Also known as a Chapter 9 bankruptcy. Municipalities” include villages, cities, towns, counties, districts, school districts, and municipal utilities.

Non-Secured Debts- These are debts that aren’t secured by any property. This includes things like credit card debt, medical bills, personal unsecured loans, and others. Creditors do not have any rights to collateral for these kinds of debt.

Redemption- Debtors may keep exempt secured property where money is owed, so long as they continue paying the creditor the collateral value of the property instead of the amount of debt.

Secured Debts-These are debts, such as loans, in which the creditor has security interest in the property that’s provided as collateral. In other words, debt that is tied to an asset such as a mortgage, for example.


  1. Nolo
  2. Investopedia
  3. Bankrate

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