FAQ
“2004″ Exam
Under Bankruptcy Rule 2004, examination of any entity is permitted with court approval. The examination is usually conducted as an oral deposition, but the scope is broad and is not limited to a specific adversary proceeding. Unlike a deposition, a motion and order are required. The order may also provide that the person being examined produce documents.
Abandonment
The process by which a trustee designates property in which the bankruptcy estate has no interest. Abandonments must generally be applied for and noticed to creditors. The effect of an abandonment is to lift stays only against the bankruptcy estate’s interest in property, and is not inconsistent with the debtor’s retention of property under a reaffirmation agreement or redemption. See 11• U.S.C. § 554.
Abstention
The doctrine under which the district court or bankruptcy court may decide not to hear a matter that it determines is more appropriately heard in another court, usually a state court or tax court. Abstention by the bankruptcy court is mandatory on “noncore” matters that involve only state law and that may be commenced quickly in another forum. Motions for abstention are filed in the bankruptcy court.
Adequate Protection
A concept developed to ensure that a creditor’s interest in property is protected during the pendency of a bankruptcy. Examples set forth in 11 U.S.C. § 361 include: (1) replacement liens; (2) cash payments; or (3) an “indubitable equivalent.” An “equity cushion” is also asserted as adequate protection. The concept is crucial in stay relief, cash collateral, and asset sale proceedings.
Administrative Claim
Those claims that are reasonable and necessary expenses of the estate postpetition, including postpetition wages, taxes, the DIP’s and creditors’ committee’s attorneys’ fees and costs, other professional fees and costs (accountants, and so forth), and the compensation/reimbursement for a trustee or an examiner.
Adversary Proceeding
Type of action defined in Bankruptcy Rule 7001 that must be commenced by the filing of a complaint, requires a $120 filing fee, and must be served with a summons. All normal discovery rules of the Federal Rules of Civil Procedure (as modified by the Bankruptcy Rules) apply in adversary proceedings.
Allowed Secured Claim
Under bankruptcy law, a secured claim is allowed to the extent of the value of the collateral securing it. The balance is treated as an unsecured claim. For example, a bank with a $100,000 debt secured by assets with a fair market value of $50,000 at the time of the bankruptcy filing has an allowed secured claim of $50,000 and an unsecured claim of $50,000. See 11 U.S.C. § 506.
Automatic Stay
When the debtor files bankruptcy, creditors everywhere are automatically enjoined and stayed from proceeding in any way to collect their debts from the debtor. 11 U.S.C. § 362(a). The Code provides extended damages for willful violations of the stay and modifies it in certain lease situations. Moreover, the Code prohibits acts to exercise control over property of the debtor.
BAFJA
Bankruptcy Amendments and Federal Judgeship Act of 1984. This act added many new provisions to the Code.
Bankruptcy
A federal system for collective creditor payment from the assets of the debtor that are not exempt.
Bankruptcy Appellate Panel
(BAP) The potential first level of appellate review in those circuits wherein they exist (currently only the Ninth Circuit, but adopted nationwide as a result of the 1994 Bankruptcy Reform Act). A BAP is comprised of seven bankruptcy judges who are appointed to serve by the Circuit Court of Appeals. A panel of three of these judges sits as the first level of appellate review. A decision of the BAP is then appealed to the circuit court of appeals. All appeals are automatically referred to the BAP, but any party may opt out of the BAP, whereupon the first appellate level will be the United States District Court. See 28 U.S.C. § 158.
Bankruptcy Code
Provisions passed by Congress, found in Title 11, United States Code, in 1978 from which the structure, parties, and their rights and duties emanate. The Bankruptcy Code has been amended numerous times since 1978, the most recent substantive amendment being the 2005 Bankruptcy Abuse and Consumer Protection Act (BACPA).
Bankruptcy Court
The branch of the federal judicial system that administers bankruptcy law, presently subordinated to the federal district court. BAFJA clearly designates the bankruptcy court as a unit of the district court.
Bar Date
A date set by the court within which pleadings must be filed. The bar date refers to the last day to file a proof of claim.
Bona Fide Purchaser
Purchaser of property or interest in property who gives fair value and has no notice of adverse claims against the property.
Cash Collateral
Collateral for a loan that is cash or a cash equivalent. Examples include accounts receivable, pledged accounts or certificates of deposit, assigned rents, or cash proceeds from the sale of collateral. The debtor is not allowed to use this type of collateral after filing bankruptcy, except by consent or an order of the bankruptcy court. The Code specifically defines cash collateral as cash proceeds of a secured party’s collateral whether the collateral was sold pre or postpetition. 11 U.S.C. § 363.
Cause
Relief from stays, dismissal, and other remedies under the Code are available on a showing of cause, that is, any ground that justifies the relief sought. Cause in stay relief matters includes a lack of adequate protection, but may also include judicial findings of bad faith or other grounds.
Chapter 11
A type of bankruptcy in which debtors attempt to prepare a plan of reorganization of their debts and assets that must be approved by the bankruptcy court. A trustee is not appointed unless the creditors so convince the court. Corporations, partnerships, and individuals may file a Chapter 11 bankruptcy. This chapter was primarily designed for business reorganizations.
Chapter 12
A form of relief added to the Code by the 1986 Bankruptcy legislation. The proceeding provides a hybrid relief for family farmers, adopting protections, rights, and duties from Chapters 11 and 13. The family farmer requirements of 11 U.S.C. § 10 1(18) and regular income requirements of 11 U.S.C. § 101(19) must be satisfied.
Chapter 13
A type of bankruptcy in which an individual with “regular income” proposes an arrangement of debts and assets (up to a three- to five-year period).
Chapter 7
A type of bankruptcy in which the debtor’s non-exempt assets are liquidated by a court-appointed trustee; often referred to as straight liquidation or straight bankruptcy. Corporations, partnerships, and individuals all may file a Chapter 7 bankruptcy.
Claim
The broad definition of a claim in the Code includes any right to payment, even if the right is in dispute or not fixed in amount, and any right to an equitable remedy for breach of performance. 11 U.S.C. § 101(5).
Co-debtor Stay
The stay of action against guarantors and co-obligors provided in Chapter 12, 11 U.S.C. § 1201, and Chapter 13, 11 U.S.C. § 1301, that applies only to individuals jointly liable on consumer debts. An expedited relief process allows termination of the stay 20 days after a request for relief is made, if no objection is filed.
Complaint
The pleading required to commence an adversary proceeding, setting forth the claims against the defendants, the basis for the claims, and a request for relief in a brief fashion.
Confirmation
The hearing before the bankruptcy court on whether the proposed plan of reorganization in a Chapter 11 case (or a plan for repayment in a Chapter 12 or 13 case) has been accepted by the necessary group or groups of creditors and also meets other statutory restrictions.
Consensual Lien
A lien created by agreement of the parties, usually by a security agreement on personal property, or a mortgage or deed of trust on real property.
Consumer Debt
The debt incurred by an individual or family for personal or household use. 11 U.S.C. § 101(8).
Contested Matter
Essentially, any disputed matter other than adversary proceedings. Bankruptcy Rule 9014. Relief in a contested matter is sought by motion, generally with no filing fee, and no responses are required unless ordered by the court. Generally, the normal discovery rules of the Federal Rules of Civil Procedure (as modified by the Bankruptcy Rules) apply in contested matters.
Conversion
The process in which a debtor determines (or a creditor moves) to change the chapter under the Bankruptcy Code under which the debtor sought relief. Most commonly, conversion is from Chapter 11 or 13 to Chapter 7, after a plan proves infeasible.
Core Proceedings
Those matters before a bankruptcy court directly tied to the bankruptcy case and arising under the Bankruptcy Code. Core proceedings include estate administration matters, allowance or disallowance of claims, use and sale of property, obtaining credit by the debtor/estate, turnover matters, preference litigation, automatic stay litigation and fraudulent conveyance litigation.
Cramdown
A slang term referring to the approval of a plan in Chapter 11, 12, or 13 over the objection of a creditor. In consumer cases, the cramdown is usually of a secured creditor that will be paid the market value of the collateral instead of the full amount of the debt. Example: Bank has a $100,000 mortgage on realty worth only $50,000; a cramdown plan would leave the bank only a $50,000 secured lien against the property and treat the remaining $50,000 as a general unsecured debt (which normally receives only a percentage payment).
De Novo
A term meaning “anew,” and referring to an appellate court’s new look at a record, on appeal, without being bound by or giving deference to a lower court’s prior findings or conclusions.
Debtor
An individual, partnership, or corporation who files a bankruptcy proceeding or has one filed involuntarily against him.
Debtor in Possession
The official title of the debtor after having filed a Chapter 11 proceeding. The debtor in possession exercises all the power and rights of a trustee in bankruptcy and is similarly charged with all of the duties. For a corporation or business partnership, this means that current management will remain in control after filing Chapter 11.
Deposition
The procedure for taking oral examination of a witness provided for in the Federal Rules of Civil Procedure and applicable in adversary and contested matters. It differs from a 2004 exam in that no court order or motion is necessary to notice a deposition, but an adversary proceeding or contested matter must first be pending and the scope of questioning is somewhat more limited.
Discharge
The official order of the court that releases the individual debtor from all of his or her unsecured debts incurred prior to bankruptcy and bars creditors from future collection efforts on released debts. Certain debts (child support, student loans, certain credit card binge debts, and so forth) are not discharged as a matter of law. Secured debts are not discharged, except to the extent that the collateral is insufficient to cover the amount of the claim.
Disclosure Statement
A document, similar to a stock prospectus that is sent to the creditors explaining the background of the proposed Chapter 11 plan. The disclosure statement must be approved by the bankruptcy court and must be mailed to the creditors with the proposed plan.
Dismissal
The process by which a bankruptcy case or proceeding is terminated. Dismissal of a case terminates all stays and the existence of the estate.
Distribution
The process under a plan of reorganization wherein proceeds of the estate are paid to various classes of claimants.
Docket
The summary of pending legal matters and their times, dates, and places. Law firms often maintain a docket as a calendar system. Court clerks maintain docket sheets as an index to a case file, and to indicate matters pending on the court’s calendar.
Equity Cushion
A form of adequate protection wherein the value of property is compared to a claimant’s lien interest; junior liens are not considered as deductions from value.
Estate
Estate Upon the filing of a bankruptcy petition, a new entity is created consisting of all of a debtor’s legal and equitable rights in and to the debtor’s property, which entity is termed the bankruptcy estate. The representative of the estate in a Chapter 7 or 13 is the trustee, but in the Chapter 11 case it is the debtor in possession.
Ex Parte
Without notice to other parties. Ex parte relief is granted only in emergency circumstances.
Examiner
A court-appointed investigator authorized to delve into the financial and business affairs of a Chapter 11 debtor in possession. Examiners are frequently accounting firms. Examiners generally have limited powers and are compensated as an administrative claim of an estate. Examiner appointments are mandatory in certain circumstances. See 11 U.S.C. § 1104(c).
Exclusivity Period
Period In Chapter 11 cases, a period of 120 days after the order for relief is entered wherein only the debtor may file a plan of reorganization. This period may be extended for cause, or be shortened or terminated for cause or as the result of a Chapter 11 trustee being appointed.
Executory Contract
An unexpired contract requiring performance by both parties, which the trustee or debtor may elect to assume and continue or reject. Example: The trustee might elect to keep a valuable lease by paying the back rent and assuming the lease. Special rules apply to collective bargaining agreements, retiree benefit plans, shopping center leases, time share contracts, and intellectual property licenses.
Exemptions
Those interests in property that a debtor is allowed to claim as not subject to creditors’ claims as provided in 11 U.S.C. § 522 and/or under state law.
Family Farmer
For the purposes of the Chapter 12 provisions, a family farmer is an individual (and spouse) engaged in farming operations or corporation that meets the debt limitation of $1.5 million, plus certain other debt and ownership restrictions set forth in 11 U.S.C. § 101(18)(A) and (B).
First Meeting of Creditors
341 Meeting) The debtor’s first duty to appear and testify under oath and to be questioned by creditors occurs at this meeting. In consumer bankruptcy cases, creditors rarely attend.
Foreign Subpoena
A subpoena served outside the jurisdiction in which a bankruptcy case is pending, usually by having another district court reissue a subpoena obtained locally.
Fraudulent Conveyance
Under both state and federal law, a transfer of property by the debtor for less than the true value of the property during the year (or more) prior to bankruptcy. Example: Debtor transfers real property worth $10,000 to an uncle for $50 during the year prior to bankruptcy. Such fraudulent conveyances may be voided.
Indubitable Equivalent
A form of adequate protection allowing the court or debtor flexibility in fashioning a remedy that protects a creditor’s interest in collateral; for example, giving a portion of collateral back to a lender in partial satisfaction of debt. See 11 U.S.C. § 361.
Insider
Someone who has a particularly close relationship to the debtor. This can include relatives, partners, or partnerships, affiliated companies (parents or subsidiaries), or a “person in control” of the debtor. The danger of being an insider is that it increases one’s vulnerability to a preference suit by the trustee. Whereas unsecured creditors are susceptible to preference recoveries for payments made during the 90 days prior to bankruptcy, insiders are vulnerable for payments received within one year prior to bankruptcy.
Insolvent
The general inability to pay debts as they become due, or a financial condition whereby liabilities exceed the value of assets at a fair market valuation.
Interlocutory
Not final. Regarding judgments and orders of the bankruptcy court, an interlocutory order may not be appealed to the bankruptcy appellate panel or district court without obtaining, by motion, leave of court. A motion for leave to appeal is filed with the notice of appeal.
Involuntary Petition
A petition filed by creditors seeking an order for relief against the debtor under Chapters 7 or 11. Creditors are usually seeking to stop an action of another creditor by the imposition of the automatic stay, or control over actions of insiders through protections. 11 U.S.C. § 303; Rules 1003, 1010, 1011, 1013; Official Form 5.
Judicial Lien
A lien (or interest in property) obtained by judgment, levy, sequestration, or other legal or equitable remedy, and includes garnishment liens. 11 U.S.C. § 101(32).
Jurisdiction
The power of a court over persons, property, or the subject matter of dispute. Bankruptcy courts are commonly held to have nationwide jurisdiction over persons.
Lien
A charge against or interest in property taken to secure payment of a debt or performance of an obligation. 11 U.S.C. § 101(33). Generally, liens are consensual (by agreement), judicial, or statutory.
Motion
A pleading used to commence contested matters, usually setting forth the factual and legal basis for relief. Any request for a court order that is not an adversary proceeding under Rule 7001 should be commenced by a motion.
Noncore Proceedings
A claim or action that is related to a bankruptcy case but is not a care matter. The bankruptcy court does not have jurisdiction to render a final order on noncore matters absent consent of all parties, which may be implied under certain circumstances.
Nondischargeability
A creditor may file an adversary proceeding in the bankruptcy court to have a particular unsecured debt declared nondischargeable; that is, after bankruptcy the debtor would still owe the creditor the money. Grounds for a nondischargeability suit include fraud, false financial statements, and tax-related debts. BAFJA and the 1994 Bankruptcy Reform Act added three grounds—credit card binges, injuries caused by drunk drivers, and child support for illegitimate children.
Notice
In Bankruptcy Rules and Code, notice requirements are whatever notice is appropriate under the circumstances. Forms of notice may include formal written notice or telephone notice, depending on the matter. 11 U.S.C. § 102(1).
Objection to Discharge
A creditor’s adversary proceeding to have the debtor’s discharge of debts entirely prevented. Grounds for a total bar of the discharge generally concern misconduct by the debtor after filing bankruptcy and/or dishonesty with the court in preparing Statements of Financial Affairs and Schedules.
Perfection
Steps necessary under the Uniform Commercial Code to make a lien effective as to third parties and, ultimately, effective against a trustee in bankruptcy. Forms of perfection usually involve filing of documents in the public records for the county or state in which the property is located.
Petition
The document filed by a debtor that initiates a bankruptcy proceeding. Petitions may be filed voluntarily by the debtor or filed involuntarily. For an involuntary petition to be filed, the debtor (or a general receiver appointed over the property) must generally not be paying debts as they come due. If the debtor has more than 12 creditors, then three creditors with claims totaling at least $5000 are required to file an involuntary petition; if less than 12 creditors, only one petitioning creditor is necessary if the claim equals or exceeds $5000. See Official Forms 1.
Plan
A document that divides the claims of creditors into groups and restructures their payments and/or collateralization. Some creditors are not affected and are considered “unimpaired.” All creditors (other than unimpaired creditors) vote on the plan or reorganization. Each class that is impaired must accept the plan by: (1) a majority in the number of claims; and (2) two-thirds in total amount of claims based on ballots filed. In addition, the bankruptcy statute sets certain minimum limits that a creditor can be forced to accept based on the value of the estate and the value of the creditor’s collateral.
Preference
A payment made to an unsecured creditor or, possibly, an undersecured creditor during the 90 days prior to the bankruptcy filing. These payments are voidable and recoverable by the trustee (or even the debtor on behalf of the estate). An unsecured or undersecured creditor who receives new security during the 90-day period also receives a preferential transfer, and the new collateralization may be voided. The Code prohibits a trustee from bringing a preference action if the amount to be recovered is less than $600.
Prima Facie
Presumption that facts are true unless rebutted by opposing party. A proof of claim is prima facie proof of the claim amount until a party objects and presents evidence to the contrary.
Priority Claims
Claims that, under the Code, must be paid before unsecured claims may be paid anything. Examples: taxes, wages, consumer deposits, and so forth. Priority claims also include, as a first priority, all administrative claims of the estate.
Pro Hac Vice
Signifies the admission of a member of the bar in one jurisdiction to practice, usually on a limited matter, in another jurisdiction’s courts. A member of the bar of the second jurisdiction must generally move for admission pro hac vice of the out-of-state attorney.
Proof of Claim
Claim A pleading filed with the clerk of the bankruptcy court setting forth the claim’s amount, nature, and classification (such as, secured, unsecured, administrative, priority, and so forth). The supporting documentation is usually attached.
Purchase-Money Security Interest
A security interest taken by a creditor in property that the debtor acquired with funds advanced by the creditor taking the security interest.
Relief from Stay
A contested matter filed with the bankruptcy court in which the creditor requests that the court modify or lift the stay to allow the creditor to proceed in its actions against the debtor’s property. Example: A secured creditor requests the court to lift the automatic stay in order to continue the state court foreclosure on the debtor’s realty. The creditor normally asserts that the secured position does not have adequate protection. Example: a $100,000 mortgage on realty worth only $75,000.
Security Agreement
An agreement between a creditor and debtor that creates a consensual lien under the Uniform Commercial Code.
Security Interest
The creditor’s right in property created in a security agreement.
Statement of Financial Affairs
Document that must be filed by all debtors, under penalty of perjury, listing detailed information as to the whereabouts of financial records, pre-bankruptcy transfers, pre-bankruptcy income, and so forth. See Official Form 7.
Statutory Lien
A lien created by operation of law, such as a garageman’s lien, a stableman’s lien, or a landlord’s lien.
Stipulation
A voluntary agreement between parties resolving a legal dispute or a part thereof. In a bankruptcy proceeding, stipulations often must be noticed to creditors.
Strong-Arm Power
The power of the trustee or DIP to avoid certain liens and bring property into the estate for the benefit of creditors.
Sua Sponte
On the court’s own motion.
Subordinated Claim
A claim that takes a junior position in priority to other claims. Claims may be subordinated by agreement or through an adversary proceeding.
Subpoena
A command of the court for the party to whom it is addressed to appear at a certain place, at a certain time.
Subpoena Duces Tecum
A command of the court for the party to whom it is addressed to appear and produce certain documentary evidence.
Subrogation
The substitution of one party into another party’s position. For example, when a guarantor pays the debtor’s obligation to a creditor, the guarantor steps into the shoes of the creditor and may pursue the creditor’s claim.
Trustee
A person appointed by the court to administer the bankruptcy estate. In a no asset Chapter 7, the trustee’s primary function is review of the petition to ensure compliance with the Code. If a trustee is appointed in a Chapter 11, he or she is charged with responsibility for proposing a plan of reorganization. In Chapters 12 and 13, a standing trustee exists to administer the plan.
U.S. Trustee In all districts, a formal Office of the United States Trustee exists as an arm of the U.S. Department of Justice. The U.S. Trustee, not the court, appoints trustees from a private panel. The U.S. Trustee program was designed to free the courts from administrative supervision over trustees.
U.S. Trustee In all districts, a formal Office of the United States Trustee exists as an arm of the U.S. Department of Justice. The U.S. Trustee, not the court, appoints trustees from a private panel. The U.S. Trustee program was designed to free the courts from administrative supervision over trustees.
Unsecured Claim
Those claims asserted in a bankruptcy proceeding that are not bolstered by lien rights in any real property or personal property of the estate or the debtor. An unsecured claim may have priority over other claims. See Administrative Claim.
Venue
A concept determining proper geographical location for filing a bankruptcy case or other action. Venue is proper if the debtor has resided or has a domicile, place of business, or property in the district for 180 days preceding the filing of the petition. 28 U.S.C. §§ 1408 et seq. More than one venue may be proper in a case.
