Definitions of Bankruptcy

Anyone going through bankruptcy proceeding should be familiar with terms and words involved in such cases.

A bankruptcy lawyer should be able to clearly explain the filings and proceedings to you, but having a knowledge of the legal jargon yourself can help you as the case advances.


Here are some terms you should know:

Attachment: Seizure or repossession of a debtor's property by a creditor. It is approved by a judge after bankruptcy is declared. Items for attachment could include property and bank accounts. The seized items go toward the outstanding debt of the person declaring bankruptcy. This is not the same as liquidation.

Bankruptcy: The legal process that a person goes through when unable to pay his or her debts. The person's assets are liquidated and distributed to creditors via a court-appointed trustee.

Community debt: Debt incurred by a spouse and generally for the benefit of both individuals. Both parties may be liable for community debt. It is normally paid off through proceeds from selling community property.

Discharge: When the debt is no longer enforceable against the debtor. Before discharge is allowed, a creditor can go through legal means, such as garnishing wages. Once a debt is discharged, the creditor can not seek to recover it.

Exempt property: Items that the debtor can keep that are not subjected to liquidation. Exempt property could include clothes, cars and home furnishings.

Fair market value: An educated estimate of the price an asset would get if sold. Most often used for residential property. Fair market value is not the same as original purchase price, which is not necessary what something is worth now because of appreciation or depreciation.

Garnishment: Taking money from a debtor's wages to pay an outstanding debt. However, when a person files for bankruptcy, wage garnishment stops.

Indemnify: When one party guarantees to pay the debt of another. In bankruptcy cases, it would be one spouse taking on debts while the other spouse is held harmless.

Joint bankruptcy petition: A single bankruptcy petition filed by a husband and wife.

Liquidation: Sale of a debtor's property. Proceeds of the sale are divided among creditors to pay off debts.

Means test: Formula used to determine who is eligible to file for bankruptcy under chapter 7 and who has to file under chapter 13 (the filing requirement for people with too much income to qualify for chapter 7).

Non-exempt assets: Assets that can be liquidated by a bankruptcy trustee and used to pay creditors. Non-exempt items differ by state, but normally include stocks and investments, a second car or second vacation home, bank accounts and musical instruments not related to individuals' work.

Objection to exemptions: Argument by a trustee or creditor for certain items not being kept from the liquidation process. Exemptions are intended to give the person filing for bankruptcy the chance to have a successful start once exiting bankruptcy.

Proof of claim: A document filed in bankruptcy court by a creditor to substantiate a claim and to determine if an unsecured creditor, such as a credit-card company, will be paid.

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