Glossary of Common Bankruptcy Terms

(available at: http://www.bankruptcydata.com/Glossary.htm)

absolute priority – the order of payment to the different classes of creditors mandated by the Bankruptcy Code. Claimants with higher priority are paid in full before other claims receive anything. Junior creditors and shareholders are paid after senior creditors. Specifically, the usual order is: first, administrative claims; second, statutory priority claims such as tax claims, rent claims, consumer deposits, and unpaid wages and benefits from before the filing; third, secured creditors' claims; fourth, unsecured creditors' claims and fifth, equity claims.

adequate protection – the right of a party with an interest in the debtor's property (such as a secured creditor) to assurance that its interest will not be diminished during the bankruptcy proceedings.

administrative claim (or administrative expense claim) – debt incurred by the debtor, with court approval, after the bankruptcy filing including: necessary costs of preserving the estate, wages, salaries, court costs, lawyers' fees, accountants' fees, trustees' expenses, etc.

adversary proceeding – a lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the bankruptcy court.

allowed claim (or allowed interest) – a claim of a creditor (or an equity interest) that is approved by the court under the plan of reorganization.

arrangement – may refer to a variety of formal or informal agreements concerning the conditions under which a bankrupt company may operate; often, it refers to an extension of time in which debt can be paid off. This was the term used under the old Chapter XI.

automatic stay – the suspension of actions, such as debt collection or foreclosure, against the company in bankruptcy. This occurs automatically when a bankruptcy petition is filed. This action protects the debtor from creditors seeking to seize its assets. It protects some creditors in that it prevents one creditor from obtaining an excessive share of the assets of the bankrupt company to the exclusion of the other creditors.

avoidance power – the power of the court to invalidate certain obligations or transactions undertaken by a debtor prior to filing bankruptcy. It is generally intended to reverse transfers of property that favor one creditor over another.

bankrupt – the entity that files a bankruptcy; the debtor; the insolvent entity. This is a non-technical term and is not used in the Bankruptcy Code.

bankruptcy – (see also failure and insolvency) a legal procedure for dealing with debt problems of individuals and business. A non-technical term for a legal state of insolvency.

bankruptcy administrator – an officer of the judiciary serving the judicial districts of Alabama and North Carolina who, like a United States trustee, is responsible for supervising the administration of bankruptcy cases, estates and trustees; monitoring plans and disclosure statements, creditor committees and fee applications and performing other statutory duties.

Bankruptcy Court – the federal tribunal where cases under the Bankruptcy Code are litigated.

bankruptcy estate – all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.

bankruptcy judge – a judicial officer of the United States district court with decision-making power over federal bankruptcy cases.

bankruptcy petition – the document filed with the court to initiate a bankruptcy proceeding.

business bankruptcy – a bankruptcy case in which the debtor is a business or an individual with business related debt. Data from the U.S. Administrative Office of the Courts subdivides bankruptcies into business and non-business.

cash collateral – cash and cash equivalents held by the debtor in Chapter 11 subject to liens of other parties.

claims – rights to repayment made by creditors against a debtor; they may be liquidated, unliquidated, fixed, contingent, matured, unmatured, secured, unsecured, subordinated, legal or equitable. (See priority of claims.)

class – each of the different categories of claims against a debtor.

complaint – the initiatory document in a lawsuit that notifies the court and the defendant of the grounds claimed by the Plaintiff for an award of money or other relief against the defendant.

confirmation – the final approval by the bankruptcy court of a debtor's plan of reorganization. Confirmation takes place after the plan has been approved by creditors.

contested matter – a dispute among the parties to a bankruptcy proceeding, instituted by the filing of a motion of the court.

contingent claim – a claim that may be owed by the debtor under certain circumstances. For example, where the debtor is a cosigner on another person’s loan and that person fails to pay.

core proceedings – those proceedings that are inherent in and fundamental to the administration of a bankruptcy case. Core proceedings are subject to the jurisdiction of the bankruptcy court. Non-core proceedings may be conducted outside the jurisdiction of the bankruptcy court.

cramdown – confirmation of a plan of reorganization over the objections of one or more classes of creditors.

creditor – a person to whom or business to which the debtor owes money or that claims to be owed money by the debtor.

creditors' committee – a committee of representatives of a debtor's creditors appointed by the U.S. Trustee. The committee acts on behalf of all creditors on negotiating a plan of reorganization and other major actions. In large, complex cases, there may be more than one such committee.

debtor – the entity seeking protection from creditors under the bankruptcy laws.

debtor in possession – the debtor which remains in control of operations, as opposed to having a trustee operate the company.

default – the failure by an entity to abide by the covenants in a debt obligation or other agreement to which it is a party. The most common default is non-payment of interest or principal.

discharge (of indebtedness) – the satisfaction or elimination of the debts of the debtor by the bankruptcy court.

dischargeable debt – a debt for which the bankruptcy code allows the debtor’s personal liability to be eliminated.

disclosure statement – a comprehensive disclosure document sent to creditors when they are asked to vote on a plan of reorganization in Chapter 11.

dismissal – the termination of a bankruptcy proceeding. The bankruptcy court can dismiss a case if it deems that the debtor or three creditors should not have filed or that a plan can never be formulated.

distressed – used to describe securities, companies and related items in or near bankruptcy or insolvency. The term does not have a strict, technical or legal definition. For example, a distressed security might be a security where the issuer has defaulted or a security that is selling at a substantially discounted price where a default is expected in the future.

effective date – the date on which a plan of reorganization is implemented. It usually occurs after all the conditions to a plan of reorganization have been satisfied.

equitable subordination – the lowering of priority of a claim because the holder of the claim is found to be guilty of some kind of improper conduct.

equity – the value of the debtor’s interest in property that remains after the liens and other creditor’s interests are considered.

examiner – a professional appointed by the bankruptcy court to investigate and oversee certain aspects of the debtor or the proceedings. (By way of comparison, the role of the trustee is to operate the business of the debtor whereas the role of the examiner is to investigate and report to the court.)

executory contract – a contract in which some or all of the obligations of each party have not yet been completed. The debtor-in-possession (or trustee) is allowed to reject unilaterally certain executory contracts.

exemptions – this refers to assets or properties owned by the debtor that cannot be recovered by creditors.

failure – (see also bankruptcy and insolvency) an economic assessment of the viability of a business, it means that a firm is either not earning what is expected (i.e. it has a below normal rate of return) or is not meeting its obligations. It is not synonymous with bankruptcy because bankruptcy is more of a formal and legal definition. A failing company is not necessarily a bankrupt company and vice-versa.

fee examiner – appointed by the court to monitor fees paid to professionals in bankruptcy cases.

fraudulent conveyance – the transfer of valuable assets from a company which i) occurs when the company is technically insolvent, ii) renders the company insolvent, or iii) is made for less than adequate consideration. The spate of leveraged buyouts and other highly leveraged transactions in the 1980s has spurred a number of fraudulent conveyance allegations in recent years.

fresh start – informal term for the new accounting rules applicable to bankrupt companies. For companies that either filed for Chapter 11 after January 1991 or emerged from Chapter 11 after June 1991, assets are valued at market value rather than at historical cost.

gap period – the period between the filing of an involuntary petition and the dismissal of the petition, the entry of an order for relief or the filing of a voluntary petition (whatever the outcome).

going concern value – what a company is worth if sold as a continuing business, as opposed to its liquidation value.

impairment – when a plan of reorganization alters the contractual rights of a class of holders of claims, that class is deemed to be impaired. A class that is unimpaired is deemed to automatically accept a plan of reorganization.

insolvency – (see also bankruptcy and failure) another term used to describe a firm that is failing; generally it means that a firm's liabilities exceed its assets or that it is unable to satisfy its obligations as they come due.

insider (of corporate debtor) – a director, officer or person in control of the debtor or a partnership in which the debtor is a general partner; a general partner of the debtor or a relative of a general partner, director, officer or person in control of the debtor.

interests – the equity interests of stockholders are often referred to in bankruptcy documents merely as "interests."

interim order – a temporary order of the court pending a hearing, trial, a final order or while awaiting an act by one of the parties.

involuntary bankruptcy – a bankruptcy initiated by at least three creditors holding unsecured claims aggregating at least $5,000 against the debtor. Data from the U.S. Administrative Office of the Courts subdivides bankruptcies into voluntary and involuntary.

joinder – joinder in civil law falls under two categories: joinder of claims, and joinder of parties. Joinder of claims is addressed in U.S. law by the Federal Rules of Civil Procedure No. 18(a). That Rule allows claimants to consolidate all claims that they have against an individual who is already a party to the case. Claimants may bring new claims even if these new claims are not related to the claims already stated. Note that joinder of claims is never compulsory (i.e., joinder is always permissive), and that joinder of claims requires that the court's subject matter jurisdiction requirements regarding the new claims be met for each new claim.

joint administration – the combining of two or more bankruptcy proceedings for administrative convenience. Frequently, the cases of affiliated entities are jointly administered. Joint administration does not necessarily result in substantive consolidation. (See substantive consolidation.)

lien – a charge upon a specific property designed to secure payment of a debt or performance of an obligation.

liquidated claim – a creditor’s claim for a fixed amount of money,

liquidating reorganization – an informal term for a Chapter 11 proceeding when the company is essentially liquidated through one or more asset sales.

liquidation – the dissolution of a company, or individual; usually operations cease and assets are sold by auction; Chapter 7 is usually employed for liquidations, businesses or individuals.

liquidation value – the aggregate value of a business if its assets are sold piecemeal.

motion to lift automatic stay – a request by a creditor to allow the creditor to take an action against a debtor or the debtor’s property that would otherwise be prohibited by the automatic stay.

non-business bankruptcy – a bankruptcy categorized by the U.S. courts as a non-business bankruptcy. The debtor in a non-business bankruptcy is usually either an individual or a family farm. Data from the U.S. Administrative Office of the Courts subdivides bankruptcies into business and non-business.

nondischargeable debt – a debt that cannot be eliminated in bankruptcy.

nunc pro tunc – latin for "now for then" this refers to changing back to an earlier date of an order, judgment or filing of a document. Such a retroactive re-dating requires a court order which can be obtained by a showing that the earlier date would have been legal, and there was error, accidental omission or neglect which had caused a problem or inconvenience which can be cured.

omnibus hearing – an omnibus hearingis a Court hearing at which the Court may hear a variety of different matters relating to one particular case.

party in interest – a party who has standing to be heard by the court in a matter to be decided in the bankruptcy case. The debtor, the U.S. trustee or bankruptcy administrator, the case trustee and creditors are parties in interest for most matters.

personal bankruptcy – filed by an individual and also called a household bankruptcy, consumer bankruptcy or wage-earner bankruptcy.

petition – (or bankruptcy petition orpetition for relief) - the document that comm-ences a bankruptcy proceeding.

petition preparer – a business not authorized to practice law that prepares bankruptcy petitions.

plan of reorganization – the document setting forth how a bankrupt company plans to satisfy its creditors. The plan of reorganization is the cornerstone of a successful Chapter 11 bankruptcy.

plaintiff – a person or business that files a formal complaint with the court.

post-petition – occurs after the filing of a petition.

preference – a payment by a debtor made during a specified period (90 days or one year) prior to the filing that favors one creditor over others. Preference payments can usually be recovered and returned to the debtor's estate.

prepackaged bankruptcy – a situation where a company and its creditors agree to a plan of reorganization before the company files a bankruptcy petition. In a true prepackaged bankruptcy, a plan of reorganization is circulated and approved by creditors before the petition is filed. The court then confirms the plan and the company emerges from bankruptcy quickly.

pre-petition – occurring before the filing of a bankruptcy petition.

priority claims – administrative expenses and salaries, wages, employee benefits, customer deposits and taxes which occurred pre-petition.

pro rata – proportionately.

proof of claim – form filed by a creditor setting out its claims against a bankruptcy debtor.

receiver – particularly in foreign proceedings, or state court proceedings, a person appointed by the court to take custody of a debtor's property.

reorganization – the resolving of a Chapter 11 bankruptcy by the emergence of the debtor as a viable business. Generally, the company agrees with creditors on a plan for payment of their claims (plan of reorganization) and emerges from Chapter 11 after the plan is confirmed by the court.

restructuring – a general term applied to an out-of-court attempt to reorganize and satisfy debts. Also, see workout.

secured creditors – one of two general types of creditors of a company. Secured creditors have a lien on property of the company.

secured debt – debt backed by a mortgage, pledge of collateral or other lien. It is debt for which the creditor has the right to pursue specific pledged property upon default.

set-off – the ability to discharge or reduce a debt by applying a counter claim between the same parties. For example, a bank which has lent money to a debtor may attempt to satisfy some or all of the loan by seizing the debtor's deposits at the bank.

skeleton filing – term used in bankruptcy courts to describe a bankruptcy filing in which not all the necessary forms have been filed. Certain courts allow a case to commence if only certain important forms are filed so long as the balance of required forms are forthcoming within a certain period of time.

small claims (also sometimes called convenience claims) – under a plan of reorganization or liquidation, claims that are small (e.g. in the hundreds or thousands of dollars range) and numerous are often grouped into a single class and settled for cash for administrative convenience.

straight bankruptcy – an informal term for a Chapter 7 bankruptcy or liquidation; used more commonly to describe liquidation before the Bankruptcy Reform Act of 1978.

substantive consolidation - the combination of the estate of one debtor with the estate of one or more other debtors and the application of the combined estate to satisfy their combined liabilities. Substantive consolidation is often considered in the case of parent/subsidiary debtors and other affiliated entities.

super-priority claim – an administrative claim that will be paid ahead of other administrative and priority claims.

trustee – an agent of the court who manages the property of the debtor for the benefit of the creditors. The court appoints a trustee in most Chapter 7 cases and in Chapter 11 cases when it determines that the debtor's management should not remain in their control. This type of trustee should be distinguished from the U.S. Trustee, who plays an administrative role in all bankruptcy cases.

unsecured claim – a claim or debt for which a creditor holds no special assurance of payment; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay.

unsecured creditor – a creditor who extended credit to a debtor without collateral security. If the debtor files for bankruptcy or is levied upon, the unsecured creditors are paid on a pro-rata basis only after the claims of all secured creditors are satisfied.

unliquidated claim – a claim for which a specific value has not been determined

voluntary bankruptcy – bankruptcy filed by the debtor itself; data from the U.S. Administrative Office of the Courts subdivides bankruptcies into voluntary and involuntary.

vulture funds – (also referred to as vulture capitalists or vulture investors) - investment groups that actively participate in the restructuring of financially distressed and bankrupt companies usually by the buying or selling of large pieces of the distressed company's debt and/or equity.

workout – an arrangement, outside of bankruptcy, by a debtor and its creditors for payment or re-scheduling of payments of the debtor's obligations. Usually applies to an informal agreement between a business and its creditors, although it can be a formal agreement and it can also apply to consumer debtors.