Glossary of Terms

Arrears: Past-due monthly payments, also known as “arrearages.” Interestingly, the term “arrearages” was used as far back as the 1200s in England.

Assets: All property, including personal property and real property.

Bankruptcy trustee: A person appointed by the government to review bankruptcy documents and determine if the debtor’s assets are fully protected by the claimed exemptions. If some assets are not properly exempted, a Chapter 7 bankruptcy trustee will try to sell the unprotected assets and pay the proceeds to the creditors. If the case is a Chapter 13, the debtor can keep unprotected assets if they pay extra money through the Chapter 13 plan to compensate the creditors for keeping those assets.

Capital gain: Most income that is taxable is “ordinary” income. Ordinary income includes wages, salary, commissions, etc. However, “capital gain” is a different type of income that is taxable at 15% currently. Capital gain income includes gain from the sale of stock that increased in value during the time it was owned by the taxpayer. Another type of capital gain income can be produced by the sale of real property, particularly rental property. Taxes for rental property sales are figured differently from principal residences, and the capital gain (the difference between the sale/transaction price and the tax basis in the property) is taxed differently from ordinary income.

Chapter 7:  “Chapter 7” refers to Chapter 7 of the U.S. Bankruptcy Code, which includes Sections 701 through 784. All of these code sections apply to Chapter 7 cases.  A Chapter 7 case is often called a “liquidation” bankruptcy case because the bankruptcy trustee “liquidates” non-exempt (unprotected) assets of the debtor. People who do not own high-value assets usually can exempt all of their property. That means the bankruptcy trustee will not take any assets from them. In California (which is included in the 9th Circuit Court of Appeals), debtors who file Chapter 7 cannot protect their car loans after filing a Chapter 7 without reaffirming or redeeming (completely paying off) the loan. Reaffirming a car loan after filing a bankruptcy is very dangerous, however, because the lender can repossess it if the debtor gets behind on the payments later on.  If the car is repossessed (after the Chapter 7 is filed), the car lender can sue the debtor for the loan amount that is not paid from the proceeds of the repossession sale. If the Chapter 7 debtor just keeps making payments on the loan after filing a Chapter 7 without reaffirming the loan, the car lender can legally repossess the car at any time — even if the debtor is not behind on the regular payments.  Because of these problems, a Chapter 13 is almost always better for a person who still owes money on a car loan.

Chapter 13: “Chapter 13” refers to Chapter 13 of the U.S. Bankruptcy Code, which includes Sections 1301 through 1330. All of these code sections apply to Chapter 13 cases. A Chapter 13 is sometimes called a “reorganization” case, because it is similar to (but much simpler than) a Chapter 11 — which is a bankruptcy “reorganization” primarily for corporations, partnerships, and individuals with high debt levels. However, a Chapter 13 is very different from a Chapter 11. Most people think you cannot wipe out debt in a Chapter 13 — that because it is called a “reorganization” it means you have to pay everything back.  Luckily, that is not true. How much, if anything, you have to pay back on general unsecured claims is based on your income, your assets, and the types of debts you have. In many cases, most of the debt is wiped out or greatly reduced in amount. In addition, most of the remaining debt is put together in a “pot” and you make one monthly payment only — to the Chapter 13 Trustee — who divides it up and pays it out to your creditors according to your Chapter 13 plan. This monthly payment is usually much less than your regular payments were before the case was filed.  So, not only is the entire amount of debt reduced, but the monthly payments are also greatly reduced — in most cases.

Chapter 13 plan:  The Chapter 13 plan is a one- or two-page document that you sign and is filed in your case that tells the bankruptcy court, trustee, and your creditors what you intend to pay in your case. For example, it tells whether you are going to keep your car loan and how much you think you have to pay in order to keep it.  It also agrees to pay your “priority” debts, such as recent taxes you may owe, in full through the plan — this is required by the Bankruptcy Code. Usually, no interest accrues on the priority claim while you are paying it through the Chapter 13 plan. The plan will also say how much you are going to pay the general unsecured claims, debts like credit cards and medical bills. Quite frequently, people do not have to pay anything on those debts — they are just simply wiped out completely. For people who have car loans or recent tax debts, Chapter 13 almost always provides more protection.  In most cases, that is also true if the person owns a home. The Chapter 13 plan can provide for catching up on past-due house payments (arrears).  In some cases, more complicated provisions that can help save homes from foreclosure can be included.

Co-pay: A co-pay or co-payment is an amount that you are required to pay along with — or before — an insurance company is required to pay its portion of coverage.

Deed of Trust: A Deed of Trust is the formal legal document that is notarized and recorded with the county recorder’s office, usually by your real property lender’s title company. It states the total beginning amount of the loan and gives the trustee (who is designated in the document) the right to foreclose on the property if you get behind on your house payments. The relationship between the lender, the trustee, and the servicer has become very confused in the last few years.  Many courts in California — both state courts and bankruptcy courts — have different opinions about what gives the trustee or the servicer the right to proceed to foreclose on the property.

Discharge: When the debtor has taken the original credit counseling session (before filing the case), filed all the required bankruptcy documents with the bankruptcy court, appeared at the Section 341 meeting with the bankruptcy trustee, (and, if it is a Chapter 13 case, paid the required monthly plan payments to the Chapter 13 trustee), waited the time periods required, taken the financial management (debtor education) course and filed  certificate with the court, and filed a document requesting a discharge in the case — if everything has gone properly, you will presumably receive your bankruptcy discharge in your case.  A “discharge order” is a court order that says you no longer owe the debts you listed (that were legally able to be wiped out).  The discharge order says that those creditors can never go after you to collect those debts.  Some debts are not wiped out in a bankruptcy, such as child or spousal support and recent taxes.  However, most normal debts are wiped out by a bankruptcy discharge.  A “discharge” is what you want to get at the end of the case. It is a very good thing!

Dismissal: If your case doesn’t progress properly, your bankruptcy case could be dismissed by the court. For example, if you do not complete your credit counseling from an approved provider before you file the case, your case will almost certainly be dismissed very quickly by the bankruptcy court. In fact, when people try to file bankruptcy on their own or with the help of a “paralegal” or “bankruptcy petition preparer” this problem – and many others – arise very frequently. A high number of bankruptcy cases are dismissed almost immediately because people do not understand the critical importance of this requirement. In addition, there are other reasons why a bankruptcy case might be dismissed. For example, if the person does not attend the Section 341 meeting with the trustee, ultimately the case will be dismissed. If the case is a Chapter 13 and the person simply stops making the plan payments to the Chapter 13 trustee without making arrangements with the trustee or modifying the plan, ultimately the case will be dismissed. There are other reasons why a bankruptcy case may be dismissed, but these are the most common ones. If the case is dismissed, the creditors will be notified that the case was dismissed and that they have the right to collect their debt again. So, if you have a car loan and your case is dismissed, the lender will be able to repossess the car without warning you. You can be sued and your wages can be garnished again, also. If your case was a Chapter 13 and it is dismissed, it will probably stay on your credit report for 10 years instead of coming off in 7 years, as it likely would have if you completed the Chapter 13 case.

Exempt: An asset is “exempt” to the extent that it is protected for the debtor by the state’s exemption laws. To protect the item, only the equity (the value minus the debt secured by the asset) must be exempted. For example, a car worth $10,000 with a loan of $7,000 which has $3,000 in equity. In this case, only the $3,000 equity value is required to be covered by the exemption in order to protect the car for the debtor. In California, bankruptcy debtors are allowed to choose from two separate lists of exemptions. A person cannot choose exempt values from both lists. An example is that under one list, a single person with no dependents can exempt up to $75,000 in equity in his/her residence. The other list provides up to $23,250 in a wild-card exemption. A person who claims the $75,000 homestead exemption cannot also claim the $23,250 wild-card exemption, because those exemptions are not on the same exemption list. When a debtor files bankruptcy, one of the documents filed is Schedule C, on which the debtor lists the values of exemptions being claimed and the California law that provides the various exemptions. This is very complicated. In most cases, an experienced bankruptcy attorney is needed for this task. When a paralegal or bankruptcy petition preparer selects exemptions for the debtor’s assets, in many cases serious mistakes are made and the person loses assets that could have been protected by an experienced attorney. Unfortunately, even some attorneys (usually attorneys who do not file many bankruptcy cases) make these errors. The importance of finding an experienced and skilled attorney cannot be overstated: to try to save money by hiring someone who really does not know what they are doing can be a very expensive mistake for the debtor.

Injunction: An “injunction” is a court order that prohibits someone from doing something. The “automatic stay” in a bankruptcy case is a particular type of injunction. The automatic stay prohibits most creditors from trying to collect their debts from the person who just filed bankruptcy (or the bankruptcy estate). Therefore, the automatic stay is an injunction that prohibits creditors from doing something — trying to collect money or repossess assets from the debtor.

Junior Loan: A mortgage that was recorded last in time is junior to another mortgage on the same property that was recorded previously in time. The result of being recorded later is that the junior mortgage is “subject to” the earlier (senior) mortgage. For example, if the senior mortgage lender or servicer forecloses on the property and does not receive enough money to cover the balance on the senior loan, the junior mortgage will lose its security interest in the property and will become an unsecured loan in California. On the other hand, if the junior mortgage lender or servicer forecloses on the property, the new buyer will receive the property subject to the senior loan. The senior loan will not be wiped out but will continue to attach to and encumber the property. The new buyer will have to pay the senior mortgage. If the home’s value is less than the senior mortgage amount, there is virtually no benefit for the junior lender to foreclose on the property.

Mortgage Trustee: The deed of trust names the mortgage trustee, which is given the power to foreclose on the property if the borrower does not make the loan payments. The foreclosure sale is conducted by the mortgage trustee. See also “deed of trust” for more information.

Offer in Compromise: Sometimes government taxing agencies will consider wiping out a debt that would otherwise be collectible. This does not happen very often, however. An example that people may hear about is an “offer in compromise” regarding income tax debt that the Internal Revenue Service may accept. However, the IRS will not agree to compromise a tax debt if the person is healthy and has a history of being able to produce enough income to be able to pay the tax debt over an extended period of time. If the person who owes the debt is elderly, disabled, low-income, and does not have much property of value, it is possible the IRS may agree to compromise the tax debt. We do not represent people by submitting offers in compromise. A tax attorney, CPA, or enrolled agent may be able to help you do that.  Generally speaking, the process takes a very long time and is probably reasonably expensive (money you have to pay the tax attorney, CPA or enrolled agent). In many cases, tax debt that has been owed for some time may be wiped out in a bankruptcy case. The rules for figuring out if the taxes can be wiped out are very complicated, but our office can do that for you.

Personal Property: Personal property is an asset or item of property that is not land or fixed to land. For example, a car is personal property because it is not land or fixed to land. A bank account, stock account, and washing machine are examples of personal property. On the other hand, your home is not personal property because it includes land, as well as the house structure which is fixed to the land.

Promissory Note: A promissory note is a written agreement by a borrower to repay a loan to the person or company who lent the money to the borrower. The promissory note must provide clear terms for the repayment of the debt, including the exact amount of the original debt, and be dated and signed by the borrower. In California, a deed of trust must be backed up by a promissory note regarding the debt that is secured by the deed of trust.

Reaffirmation agreement:  A formal agreement to repay a debt that was owed before the bankruptcy case was filed. Reaffirmation agreements only apply in Chapter 7 cases. A Chapter 13 debtor does not need to reaffirm any debts.

Real property: “Real property” is land and items fixed permanently to the land, like a house or barn.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.