Essential Bankruptcy Terms
Voluntary vs. Involuntary
The vast majority of bankruptcies filed by debtors are voluntary, however, there is a concept wherein a creditor can force a person or company into bankruptcy.
Debtor vs. Creditor
Debtor owes the money/Creditor is owed the money
Consumer Debt vs. Non-Consumer Debts
Consumer debts are debts incurred by an individual for personal, family or household purposes. Typical debts that are considered “consumer” debts are your medical debts, personal credit cards, and your home mortgage. Non-consumer debts are those debts that were not incurred for personal, family or household use. While it is easy to point and say “business” debt, “non-consumer” debt is more encompassing than just business debt. For instance, tax debt is considered “non-consumer” debt, even though it may not be business-related.
Dismissal vs. Discharge
Dismissal is bad; Discharge is good. In fact, when debtors file bankruptcy, the primary goal is to get a discharge…a discharge of debt. That allows for the “fresh start” that so many debtors desperately need. A dismissal, on the other hand, generally occurs when a debtor fails to make his or her payments in their Chapter 13 Plan. A Chapter 13 Plan generally requires monthly payments by the Debtor. When the Debtor defaults on those payments, the Chapter 13 Trustee will ask to dismiss the case. If the case is dismissed, then the Debtor will be kicked out of bankruptcy and still must deal with the debt that he or she had before filing bankruptcy.
Secured vs. Unsecured debts
The concept of security is pivotal in bankruptcy and law generally. A debt is “secured” if the creditor has a lien interest against the property. Common examples of these are mortgage/deeds of trust, car liens, or UCC liens. Thus, if a debtor defaults on the underlying debt obligation, the creditor can exert its lien rights and recoup some or all of its loss via the sale of the property.
Conversely, unsecured debts are those debts that are…you guessed it…not secured. Typical debts that are unsecured are credit card debts, medical debts, & personal loans.
Dischargeable vs. Nondischargeable debt
Generally speaking, most debts are discharged or “wiped away” once a debtor files bankruptcy. A few exceptions exist however. 2
Debt vs. Lien
One of the hardest concepts to recognize for lawyer and client alike is the difference between debts and liens. While one may look at their house debt and see little difference between the debt (mortgage) and the lien (deed of trust), the concept comes to the forefront in bankruptcy. Generally speaking, bankruptcy discharges one’s obligation on debt; it does not remove liens. Example: a debtor files chapter 7 bankruptcy. All debt obligations are discharged: credit cards, medical debts, and yes, even the existing mortgage debt. Now, does that mean the debtor gets a free house? Common sense and the law clearly say no. Thus, the difference between debts and liens.
State vs. Federal law
Bankruptcy is a product of Title 11 of the US Code. Its code provisions and laws are generally dictated by that Federal set of laws. Notwithstanding, State law comes into play often in bankruptcy. For instance, many debtors facing debt problems may also have marital issues, which is wholly state law. Thus, to be a practicing bankruptcy attorney (or paralegal), then you must have a tacit understanding of many different areas of law, both Federal and State.
Arnold & Smith, PLLC has experienced attorneys in the field of bankruptcy/creditor and debtor relations and can help navigate the process for you. If you would like to set up a consultation with one of our attorneys, please do not hesitate to contact us. We look forward to assisting you.