Glossary of Common Bankruptcy Terms

Bankruptcy proceedings can be confusing. While hiring a bankruptcy attorney is likely your best bet, it is also important to understand key terms and phrases while going through the bankruptcy process. Not only will this help when speaking with your lawyer, it will also assist you if you are required to go to court. Learn the common bankruptcy terms with a detailed explanation.

Glossary of Business Bankruptcy Terms

Adversary proceeding: An adversary proceeding is a lawsuit within a bankruptcy case. In this proceeding, a bankruptcy judge rules on validity or priority of a creditor’s claim, fraudulent transfers, and injunctions.

Automatic stay: An automatic stay is a feature of bankruptcy law that goes into effect immediately upon filing a bankruptcy petition. It forces most creditors to stop all collection actions against the debtor, such as foreclosures, repossessions, garnishments, and evictions, and gives the debtor time to sort things out and come up with a solution to its problems.

Chapter 7: A Chapter 7 bankruptcy, voluntary or involuntary, permits the debtor to liquidate assets in an orderly way. In Chapter 7, a trustee is appointed, who collects all nonexempt assets of the debtor, sells those assets, and distributes the proceeds to creditors. Individuals, partnerships, and corporations may file for Chapter 7 bankruptcy. Businesses usually file under Chapter 7 when they can’t be run profitably, there is no chance of reorganizing, and the business wants to distribute its assets to creditors. There is no minimum or maximum debt limitation for Chapter 7, and the debtor need not be insolvent. If the debtor is an individual, he or she may be entitled to a “discharge” of debts. A debtor cannot dismiss a Chapter 7 case without cause and subject to court approval.

Chapter 11: A Chapter 11 bankruptcy, voluntary or involuntary, permits the debtor (usually a business) to restructure or reorganize its debt. A trustee is usually not appointed; the debtor is allowed to continue to manage its business. The debtor develops a “plan” outlining how its debts will be repaid. Usually, the plan does not primarily involve “liquidating” assets; rather, a debtor plans on reorganizing its debts so that it can continue to operate, hopefully on a profitable basis.

Individuals, partnerships, and corporations may file under Chapter 11. Businesses usually file under Chapter 11 when they are facing a cash flow shortage or temporary downturn in business. Upon confirmation, a Chapter 11 debtor receives a discharge of any debt that arose before confirmation. However, confirmation of a plan does not discharge an individual debtor from certain debts that are exceptions to discharge under the Bankruptcy Code. A debtor cannot dismiss a Chapter 11 case without cause and subject to court approval.

Chapter 11, Subchapter V: Subchapter V in Chapter 11 created by the Small Business Reorganization Act of 2019 allows small business owners to file for Chapter 11 bankruptcy under a less expensive and more streamlined process.

Chapter 13: A Chapter 13 bankruptcy is used by individuals (including those engaged in business) to restructure or reorganize debt. A debtor “engaged in business” is someone who is self-employed and incurs trade credit in the production of income from that employment. The debtor may continue to operate his or her business in a Chapter 13 case. Partnerships and corporations may not file under Chapter 13. 

The debtor proposes a plan that outlines how his or her debts will be repaid. The debtor must devote all of his or her disposable income to payments under the plan for three to five years. To qualify for Chapter 13 in 2026, a debtor must have regular income; unsecured debts of less than $526,700; and secured debts of less than $1,580,125. A trustee is appointed in a limited capacity. The debtor receives a discharge when he or she has completed all payments under the plan. Only a debtor may commence a Chapter 13 bankruptcy proceeding. Creditors may not commence an involuntary proceeding under Chapter 13. A debtor may dismiss a Chapter 13 case.

Discharge: Generally, a discharge in bankruptcy means that an individual debtor‘s obligations are erased or wiped out. It protects the debtor from personal liability on the discharged debt and is only available to certain debtors and for certain debts. For example, debtors that are not individuals cannot receive a discharge in a Chapter 7 bankruptcy. In addition, if a corporate or partnership debtor is liquidating under Chapter 11 and will not continue operating on consummation of a plan, it will not receive a discharge. A creditor or the trustee may object to a debtor’s general discharge if the debtor has committed a fraud on the court. 

Discharge exceptions: Chapter 7: Certain particular debts are not dischargeable under Section 523 of the Bankruptcy Code. Debts that are not dischargeable include:

1. Debts for certain taxes;

2. Debts arising from false pretenses, false representation, actual fraud, or false financial statements;

3. Debts for certain luxury goods and cash advances;

4. Debts that a debtor fails to list in the bankruptcy schedules;

5. Debts arising from fraud or defalcation, embezzlement, or larceny;

6. Debts for alimony and child support, and other obligations arising out of a divorce or separation;

7. Student loans;

8. Restitution orders;

9. Debts arising from willful and malicious injury.

Discharge exceptions: Chapter 11: The debtor receives a discharge of all debts that arose before confirmation of the plan. If the debtor is an individual, however, the same exceptions to discharge found in Section 523 of the Bankruptcy Code apply.

Discharge exemptions: Chapter 13: The only debts excepted from discharge under Chapter 13 are: (1) debts that were not listed on the debtor’s bankruptcy schedules; (2) debts for spousal maintenance, alimony, and child support; (3) student loans; (4) criminal fines and restitution; and (5) debts related to driving while intoxicated.

Exemptions: Individual debtors are entitled to keep certain assets free from the claims of creditors, under federal or state exemption laws. Typical exemptions are the homestead exemption (equity in your personal residence); cash value of insurance policies, household goods and furnishings, clothing, wages, and tools used in the debtor’s job. The amount of the exemption depends on whether federal or state exemptions are available and/or used.

Fraudulent transfer: A fraudulent transfer is a transfer made by a debtor with the intent or effect of reducing the assets available to creditors. A trustee has the power to avoid transfers of the debtor made with actual intent to hinder, delay, or defraud creditors, and certain transfers for which the debtor did not receive a reasonably equivalent value in exchange for the transfer.

Involuntary bankruptcy: In some cases, creditors may file a petition to commence an involuntary bankruptcy. Creditors may commence a Chapter 7 or a Chapter 11 case if they hold the required amount of debt.

Meeting of creditors: Also known as a 341 Meeting, this is a mandatory meeting in which the debtor appears with the creditors. The debtor is under oath and answers questions about the debtor’s property, debts, income, and recent financial transactions.

Nondischargeable debt: Money still owed despite bankruptcy protection. These debts such as unpaid payroll taxes remain the responsibility of the debtor.

Plan confirmation: The court approval of a business’s reorganization plan in Chapter 11 bankruptcy proceedings.

Preference: A preference is a payment received from a debtor by a creditor in the ninety days before the debtor’s bankruptcy filing. The trustee can recover such a payment if:

1. The debtor made the payment within ninety days of filing bankruptcy;

2. The payment was made to or for the benefit of a creditor on a pre-existing debt; and

3. The debtor was insolvent when it made the payment.

Preferential payment: A payment made to a creditor in the 90 days before a bankruptcy filing that may be voided by the court if it gives that creditor an unfair advantage over other creditors.

Secured creditor: A creditor who has a legal claim to specific assets of a business, such as a mortgage on property or a lien on equipment.

Reaffirmation agreement: This is an agreement between the debtor and the debtor’s creditor in which the debtor agrees to a repayment even though the debtor filed for bankruptcy. A reaffirmation agreement must be in writing and approved by the court.

Relief from the automatic stay: Although the automatic stay prohibits collection of debts by a creditor, including secured creditors, a secured creditor can ask the bankruptcy court for “relief” from the automatic stay under certain conditions. 

Reorganization plan: A plan created by a business in Chapter 11 bankruptcy that outlines how it will restructure its operations and repay its creditors (this is mentioned under term Chapter 11 but please list separately and use keyword “reorganization plan”)

Trustee: There are several “types” of bankruptcy trustees. The U.S. Trustee is responsible for oversight of the bankruptcy process as a whole. Their duties are to maintain and supervise a panel of private trustees (usually, but not always, private attorneys) to serve in Chapter 7 cases, review fee applications filed in Chapter 11 cases, monitor plans and disclosure statements in Chapter 11 cases, monitor activities of creditor’s committees, monitor the progress of Chapter 11 cases, and assist the United States Attorney in criminal prosecutions.

Unsecured creditor: A creditor who does not have a legal claim to specific assets of a business, and may be paid a smaller portion of the debt owed during bankruptcy proceedings (similar to above, this is related to Automatic Stay but should be listed separately).

Voluntary bankruptcy: A debtor files a petition to commence a voluntary bankruptcy.

Hire a Legal Expert

If you are struggling with whether or not to file bankruptcy, or just need some legal advice, contact an experienced bankruptcy attorney in your area today. Bankruptcy attorneys can answer many of your questions about Chapter 7, Chapter 11, Chapter 13, and more.