"Defalcation" in context of bankruptcy discharge defined by the Supreme Court in Bullock v. Bankchampaign, N.A. May 13, 2013

Click here for the full decision:

http://www.supremecourt.gov/opinions/12pdf/11-1518_97be.pdf

Petitioner’s father established a trust for the benefit of petitioner and his siblings, and made petitioner the (nonprofessional) trustee. The trust’s sole asset was the father’s life insurance policy. Petitioner borrowed funds from the trust three times; all borrowed funds were repaid with interest. His siblings obtained a judgment against him in state court for breach of fiduciary duty, though the court found no apparent malicious motive. The court imposed constructive trusts on certain of petitioner’s interests—including his interest in the original trust—in order to secure petitioner’s payment of the judgment, with respondent serving as trustee for all of the trusts. Petitioner filed for bankruptcy. Respondent opposed discharge of petitioner’s state court-imposed debts to the trust, and the Bankruptcy Court granted respondent summary judgment, holding that petitioner’s debts were not dischargeable pursuant to 11 U. S. C. §523(a)(4), which provides that an individual cannot obtain a bankruptcy discharge from a debt“for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”  The Federal District Court and the Eleventh Circuit affirmed. The latter court reasoned that “defalcation requires a known breach of fiduciary duty, such that the conduct can be characterized as objectively reckless.”
Held: The term “defalcation” in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.

(a) While “defalcation” has been an exception to discharge in a bankruptcy statute since 1867, legal authorities have long disagreed about its meaning. Broad definitions of the term in modern and older
dictionaries are unhelpful, and courts of appeals have disagreed about what mental state must accompany defalcation’s definition.

(b) In Neal v. Clark, 95 U. S. 704, this Court interpreted the term “fraud” in the Bankruptcy Code’s exceptions to discharge to mean “positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, as does embezzlement; and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality.” Id., at 709. The term “defalcation” should be treated similarly. Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, “defalcation” requires an intentional wrong. An intentional wrong includes not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Where actual knowledge of wrongdoing is lacking, conduct is considered as equivalent if, as set forth in the Model Penal Code, the fiduciary “consciously disregards,” or is willfully blind to, “a substantial and unjustifiable risk” that his conduct will violate a fiduciary duty.

(c) Several considerations support this interpretation.

First, statutory context strongly favors it. The canon noscitur a sociis argues for interpreting “defalcation” as similar to its linguistic neighbors “embezzlement,” “larceny,” and “fraud,” which all require a showing of wrongful or felonious intent. See, e.g., Neal, supra, at 709.

Second, the interpretation does not make the word identical to its statutory neighbors. “Embezzlement” requires conversion, “larceny” requires taking and carrying away another’s property, and “fraud” typically
requires a false statement or omission; while “defalcation” can encompass a breach of fiduciary obligation that involves neither conversion, nor taking and carrying away another’s property, nor falsity.

Third, the interpretation is consistent with the longstanding principle that “exceptions to discharge ‘should be confined to those plainly expressed.’ ” Kawaauhau v. Geiger, 523 U. S. 57, 62.
It is also consistent with statutory exceptions to discharge that Congress normally confines to circumstances where strong, special policy considerations,such as the presence of fault, argue for preserving the debt, thereby benefiting, for example, a typically more honest creditor. See, e.g., 11 U. S. C. §523(a)(2)(A).

Fourth, some Circuits have interpreted the statute similarly for many years without administrative or other difficulties. Finally, it is important to have a uniform interpretation of federal law, the choices are limited, and neither the parties nor the Government has presented strong considerations favoring a different

Vacated and remanded.
BREYER, J., delivered the opinion for a unanimous Court.

Fighting Back!

A couple filed for Chapter 7 relief under the bankruptcy code and discharged their debts.  Apparently ignoring all of this, Bank of America pursued the Humphreys after the bankruptcy case for a debt that was discharged, which violated the discharge injunction of 11 U.S.C. Section 524 of the bankruptcy code.  The bankruptcy court found that the bank contacted the Humphreys 38 times - even though the Humphreys and their lawyer told the bank to stop, that the debt had been discharged in bankruptcy. The Humphreys did not take this lightly, but rather went back into bankruptcy court and asked for relief.  The bankruptcy court judge awarded the Humphreys the legal fees they incurred ($2500) and awarded them an additional $10,000 for the distress the situation caused.

See In re James C. Humphrey, Jr., and Shannon L. Humphrey, 2012 Bankr. Lexis 1113, (Bankr. M.D. Fla. 3/24/12) (Arthur B. Briskman, Bankruptcy Judge).

Here's a summary of the case:

In re: JAMES C. HUMPHREY, JR. and SHANNON L. HUMPHREY, Debtors.

Case No. 6:10-bk-17756-ABB, Chapter 7

UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF FLORIDA, ORLANDO DIVISION

2012 Bankr. LEXIS 1113

March 14, 2012, Decided

OVERVIEW
: Chapter 7 debtors filed a motion to reopen their bankruptcy case and a motion seeking sanctions against a bank national association ("bank"), claiming that the bank violated 11 U.S.C.S. § 524(a) when its agents contacted the debtors after a debt they owed the bank's predecessor was discharged pursuant to 11 U.S.C.S. § 727 and demanded that the debtors pay the debt. The court held a hearing on the debtors' motion for sanctions.  The debtors declared bankruptcy in October 2010, that they listed a home loan servicing business as a secured creditor that was owed $153,598. The court sent notice of the debtors' bankruptcy case to the business; however, the business did not did not seek relief from the automatic stay or otherwise make an appearance in the debtors' case, and the debtors received a discharge pursuant to 11 U.S.C.S. § 727 in January 2011. A bank acquired the mortgage on the debtors' property and it agents contacted the debtors on 38 occasions after they received their discharge, demanding payment. The court found that the bank violated the discharge injunction that was imposed pursuant to 11 U.S.C.S. § 524(a) and caused the debtors emotional distress, and it awarded the debtors $10,000 in damages and 2,500 in attorney's fees. The bank's agents continued to contact the debtors after the bank was informed by the debtors and their attorney that the debt was discharged, and in doing so they willfully and intentionally violated the discharge injunction and acted in bad faith. The debtors' damages included significant aggravation, emotional distress, inconvenience, and attorney's fees.
DECISION: The court found that the debtors were entitled to an award of actual damages pursuant to 11 U.S.C.S. § 105(a) and the court's inherent power to hold parties in contempt of court, and it awarded the debtors $12,500 plus interest and enjoined the bank from taking any further collection action against the debtors.

BANKRUPTCY TIMING

If I filed bankruptcy before, can I file again?
The answer is yes. 

The more important question is, how soon do you have to wait in between bankruptcy cases?

Chapter 7 to another Chapter 7 (8 years): 
If you filed a Chapter 7 case and received a discharge of debt , then you must wait 8 years in between filing another Chapter 7 case.  See 11 U.S.C §727(a)(8).

Chapter 13 then Chapter 7 (6 years): 
You must wait six years.  See 11 U.S.C.§727(a)(9).  However, if you paid 100% of your debts in the prior Chapter 13 case or paid at least 70% of your debts in the prior Chapter 13 case and the Bankruptcy Court found that this was your best effort then the 6-year rule does not apply.  See 11 U.S.C.§Section 727(a)(9),  provided you otherwise qualify (see my blog article on the "means" test)

Chapter 7 then Chapter 13 (4 years): 
If you previously filed a Chapter 7 case and received a discharge of debt, then you would wait four years in between the prior Chapter 7 case and the new Chapter 13 case.   See 11 U.S.C.§1328(f)(1).  But, if after filing a Chapter 7 case you file a Chapter 13 case and you do not need a discharge of debt in the new Chapter 13 case, then you do not wait.

Chapter 13 to another Chapter 13 (2 years): 
If you received a discharge of debt, meaning you completed your repayment plan in a prior Chapter 13 case, then you must wait two years before filing another Chapter 13 case or you will not receive a new discharge of debt in the new Chapter 13 case.  See 11 U.S.C.§  1328(f)(2).  But, if you are not looking for a discharge of debt in the new Chapter 13 case, then you can file another one without waiting. 

NO time (0 years): 
If you are going to pay your creditors back 100% and do not need a discharge of debt, then you do not need to wait to file a Chapter 13 case. Why would you file a bankruptcy case and not care about discharging debt?  A common answer is that you have fallen behind on your mortgage payments, or other types of payments, and you want to catch up and a Chapter 13 repayment plan would allow you to do that.  For example, if you fall behind in your mortgage payments for several months, it is nearly impossible to catch up quickly and you do not want to lose your house, and a Chapter 13 payment plan would allow you to spread those arrearages over a repayment plan of 3-5 years.

"Good Faith Rule": 
All cases must be filed in good faith to receive protection under the Bankruptcy Code, regardless as to timing.

Discharge of Debts through Bankruptcy

The end result of bankruptcy is to discharge the debts you cannot pay.  Most debts are dischargeable.

If you successfully complete the Chapter you have filed in the Bankruptcy Court, then you should receive an order of discharge (available only to persons, not businesses) often called the “debtor’s discharge”. 

Once a debt is discharged, the person or entity to whom you owe that debt (called a "creditor") cannot continue any collection efforts against you to collect it, they cannot contact you, they cannot call you, they cannot “dun” you and they cannot sue you on that discharged debt.

The Bankruptcy Code tells you what debts are not dischargeable, such as domestic support obligations, certain taxes, and a few other instances (see below).

Click on or read on (materials from US Court’s site reprinted below for ease of reference).  The US Court’s web site is a great source of basic information on bankruptcy related topics.

http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/DischargeInBankruptcy.aspx

Discharge In Bankruptcy

The bankruptcy discharge varies depending on the type of case a debtor files: chapter 7, 11, 12, or 13. Bankruptcy Basics attempts to answer some basic questions about the discharge available to individual debtors under all four chapters including:

·What is a discharge in bankruptcy?

A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.

Although a debtor is not personally liable for discharged debts, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

·When does the discharge occur?

The timing of the discharge varies, depending on the chapter under which the case is filed. In a chapter 7 (liquidation) case, for example, the court usually grants the discharge promptly on expiration of the time fixed for filing a complaint objecting to discharge and the time fixed for filing a motion to dismiss the case for substantial abuse (60 days following the first date set for the 341 meeting). Typically, this occurs about four months after the date the debtor files the petition with the clerk of the bankruptcy court. In individual chapter 11 cases, and in cases under chapter 12 (adjustment of debts of a family farmer or fisherman) and 13 (adjustment of debts of an individual with regular income), the court generally grants the discharge as soon as practicable after the debtor completes all payments under the plan. Since a chapter 12 or chapter 13 plan may provide for payments to be made over three to five years, the discharge typically occurs about four years after the date of filing. The court may deny an individual debtor's discharge in a chapter 7 or 13 case if the debtor fails to complete "an instructional course concerning financial management." The Bankruptcy Code provides limited exceptions to the "financial management" requirement if the U.S. trustee or bankruptcy administrator determines there are inadequate educational programs available, or if the debtor is disabled or incapacitated or on active military duty in a combat zone.

·How does the debtor get a discharge?

Unless there is litigation involving objections to the discharge, the debtor will usually automatically receive a discharge. The Federal Rules of Bankruptcy Procedure provide for the clerk of the bankruptcy court to mail a copy of the order of discharge to all creditors, the U.S. trustee, the trustee in the case, and the trustee's attorney, if any. The debtor and the debtor's attorney also receive copies of the discharge order. The notice, which is simply a copy of the final order of discharge, is not specific as to those debts determined by the court to be non-dischargeable, i.e., not covered by the discharge. The notice informs creditors generally that the debts owed to them have been discharged and that they should not attempt any further collection. They are cautioned in the notice that continuing collection efforts could subject them to punishment for contempt. Any inadvertent failure on the part of the clerk to send the debtor or any creditor a copy of the discharge order promptly within the time required by the rules does not affect the validity of the order granting the discharge.

·Are all of the debtor's debts discharged or only some?

Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor's drunken driving).

There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13.

Generally speaking, the exceptions to discharge apply automatically if the language prescribed by section 523(a) applies. The most common types of nondischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated, debts owed to certain tax-advantaged retirement plans, and debts for certain condominium or cooperative housing fees.

The types of debts described in sections 523(a)(2), (4), and (6) (obligations affected by fraud or maliciousness) are not automatically excepted from discharge. Creditors must ask the court to determine that these debts are excepted from discharge. In the absence of an affirmative request by the creditor and the granting of the request by the court, the types of debts set out in sections 523(a)(2), (4), and (6) will be discharged.

A slightly broader discharge of debts is available to a debtor in a chapter 13 case than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. Although a chapter 13 debtor generally receives a discharge only after completing all payments required by the court-approved (i.e., "confirmed") repayment plan, there are some limited circumstances under which the debtor may request the court to grant a "hardship discharge" even though the debtor has failed to complete plan payments. Such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor's control. The scope of a chapter 13 "hardship discharge" is similar to that in a chapter 7 case with regard to the types of debts that are excepted from the discharge. A hardship discharge also is available in chapter 12 if the failure to complete plan payments is due to "circumstances for which the debtor should not justly be held accountable."

·Does the debtor have the right to a discharge or can creditors object to the discharge?

In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor's discharge may be filed by a creditor, by the trustee in the case, or by the U.S. trustee. Creditors receive a notice shortly after the case is filed that sets forth much important information, including the deadline for objecting to the discharge. To object to the debtor's discharge, a creditor must file a complaint in the bankruptcy court before the deadline set out in the notice. Filing a complaint starts a lawsuit referred to in bankruptcy as an "adversary proceeding."

The court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; destruction or concealment of books or records; perjury and other fraudulent acts; failure to account for the loss of assets; violation of a court order or an earlier discharge in an earlier case commenced within certain time frames (discussed below) before the date the petition was filed. If the issue of the debtor's right to a discharge goes to trial, the objecting party has the burden of proving all the facts essential to the objection.

In chapter 12 and chapter 13 cases, the debtor is usually entitled to a discharge upon completion of all payments under the plan. As in chapter 7, however, discharge may not occur in chapter 13 if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapter 13 if he or she received a prior discharge in another case commenced within time frames discussed the next paragraph. Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.

·Can a debtor receive a second discharge in a later chapter 7 case?

The court will deny a discharge in a later chapter 7 case if the debtor received a discharge under chapter 7 or chapter 11 in a case filed within eight years before the second petition is filed. The court will also deny a chapter 7 discharge if the debtor previously received a discharge in a chapter 12 or chapter 13 case filed within six years before the date of the filing of the second case unless (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor's plan was proposed in good faith and the payments represented the debtor's best effort. A debtor is ineligible for discharge under chapter 13 if he or she received a prior discharge in a chapter 7, 11, or 12 case filed four years before the current case or in a chapter 13 case filed two years before the current case.

·Can the discharge be revoked?

The court may revoke a discharge under certain circumstances. For example, a trustee, creditor, or the U.S. trustee may request that the court revoke the debtor's discharge in a chapter 7 case based on allegations that the debtor: obtained the discharge fraudulently; failed to disclose the fact that he or she acquired or became entitled to acquire property that would constitute property of the bankruptcy estate; committed one of several acts of impropriety described in section 727(a)(6) of the Bankruptcy Code; or failed to explain any misstatements discovered in an audit of the case or fails to provide documents or information requested in an audit of the case. Typically, a request to revoke the debtor's discharge must be filed within one year of the discharge or, in some cases, before the date that the case is closed. The court will decide whether such allegations are true and, if so, whether to revoke the discharge.

In chapter 11, 12, and 13 cases, if confirmation of a plan or the discharge is obtained through fraud, the court can revoke the order of confirmation or discharge.

·May the debtor pay a discharged debt after the bankruptcy case has been concluded?

A debtor who has received a discharge may voluntarily repay any discharged debt. A debtor may repay a discharged debt even though it can no longer be legally enforced. Sometimes a debtor agrees to repay a debt because it is owed to a family member or because it represents an obligation to an individual for whom the debtor's reputation is important, such as a family doctor.

What can the debtor do if a creditor attempts to collect a discharged debt after the case is concluded?

If a creditor attempts collection efforts on a discharged debt, the debtor can file a motion with the court, reporting the action and asking that the case be reopened to address the matter. The bankruptcy court will often do so to ensure that the discharge is not violated. The discharge constitutes a permanent statutory injunction prohibiting creditors from taking any action, including the filing of a lawsuit, designed to collect a discharged debt. A creditor can be sanctioned by the court for violating the discharge injunction. The normal sanction for violating the discharge injunction is civil contempt, which is often punishable by a fine.

May an employer terminate a debtor's employment solely because the person was a debtor or failed to pay a discharged debt?

The law provides express prohibitions against discriminatory treatment of debtors by both governmental units and private employers. A governmental unit or private employer may not discriminate against a person solely because the person was a debtor, was insolvent before or during the case, or has not paid a debt that was discharged in the case. The law prohibits the following forms of governmental discrimination: terminating an employee; discriminating with respect to hiring; or denying, revoking, suspending, or declining to renew a license, franchise, or similar privilege. A private employer may not discriminate with respect to employment if the discrimination is based solely upon the bankruptcy filing.

·How can the Debtor obtain another Copy of the Discharge Order?

If the debtor loses or misplaces the discharge order, another copy can be obtained by contacting the clerk of the bankruptcy court that entered the order. The clerk will charge a fee for searching the court records and there will be additional fees for making and certifying copies. If the case has been closed and archived there will also be a retrieval fee, and obtaining the copy will take longer.

The discharge order may be available electronically. The PACER system provides the public with electronic access to selected case information through a personal computer located in many clerk's offices. The debtor can also access PACER. Users must set up an account to acquire access to PACER, and must pay a per-page fee to download and copy documents filed electronically.

POST PUBLISHED BY PATRICIA S. GARDNER, ESQ.
GARDNER LAW FIRM
1 New Hampshire Ave, Suite 125
Pease International Tradeport
Portsmouth, NH 03857
Phone: 1-603-766-4933
Fax 1-603-292-5207
email:
GardnerBusinessLaw@gmail.com
web site:
http://www.gardnerbusinesslaw.com/

Bankruptcy Glossary - understanding the terms used in the bankruptcy case.

Bankruptcy Glossary - understanding the terms used in the bankruptcy case.

Following a bankruptcy case can be difficult, so it is important to understand the terms used in the Bankruptcy Court.  The US Courts web site (see below link) provides definitions that make it easier to understand the bankruptcy process.  Remember, when you read the glossary, it was prepared in 2010, so please check to see if any particular definition has been updated - particularly when a dollar amount is referenced as dollar amounts in the Bankruptcy Code are normally updated on an annual basis:

http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Glossary.aspx

A

adversary proceeding

A lawsuit arising in or related to a bankruptcy case that is commenced by filing a complaint with the court. A nonexclusive list of adversary proceedings is set forth in Fed. R. Bankr. P. 7001.

assume

An agreement to continue performing duties under a contract or lease.

automatic stay

An injunction that automatically stops lawsuits, foreclosures, garnishments, and all collection activity against the debtor the moment a bankruptcy petition is filed.

B

bankruptcy

A legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code).

bankruptcy administrator

An officer of the judiciary serving in the judicial districts of Alabama and North Carolina who, like the U.S. trustee, is responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors' committees; monitoring fee applications; and performing other statutory duties. Compare U.S. trustee.

Bankruptcy Code

The informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law.

bankruptcy court

The bankruptcy judges in regular active service in each district; a unit of the district court.

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 who is the court official with decision-making power over federal bankruptcy cases.

bankruptcy petition

The document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) by which opens the bankruptcy case. (There are official forms for bankruptcy petitions.)

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C

chapter 7

The chapter of the Bankruptcy Code providing for "liquidation,"(i.e., the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.)

chapter 9

The chapter of the Bankruptcy Code providing for reorganization of municipalities (which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts).

chapter 11

The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)

chapter 12

The chapter of the Bankruptcy Code providing for adjustment of debts of a "family farmer," or a "family fisherman" as those terms are defined in the Bankruptcy Code.

chapter 13

The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)

chapter 15

The chapter of the Bankruptcy Code dealing with cases of cross-border insolvency.

claim

A creditor's assertion of a right to payment from the debtor or the debtor's property.

confirmation

Bankruptcy judges's approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13.

consumer debtor

A debtor whose debts are primarily consumer debts.

consumer debts

Debts incurred for personal, as opposed to business, needs.

contested matter

Those matters, other than objections to claims, that are disputed but are not within the definition of adversary proceeding contained in Rule 7001.

contingent claim

A claim that may be owed by the debtor under certain circumstances, e.g., where the debtor is a cosigner on another person's loan and that person fails to pay.

creditor

One to whom the debtor owes money or who claims to be owed money by the debtor.

credit counseling

Generally refers to two events in individual bankruptcy cases: (1) the "individual or group briefing" from a nonprofit budget and credit counseling agency that individual debtors must attend prior to filing under any chapter of the Bankruptcy Code; and (2) the "instructional course in personal financial management" in chapters 7 and 13 that an individual debtor must complete before a discharge is entered. There are exceptions to both requirements for certain categories of debtors, exigent circumstances, or if the U.S. trustee or bankruptcy administrator have determined that there are insufficient approved credit counseling agencies available to provide the necessary counseling.

creditors' meeting

see 341 meeting

current monthly income

The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).

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D

debtor

A person who has filed a petition for relief under the Bankruptcy Code.

debtor education

see credit counseling

defendant

An individual (or business) against whom a lawsuit is filed.

discharge

A release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.)

dischargeable debt

A debt for which the Bankruptcy Code allows the debtor's personal liability to be eliminated.

disclosure statement

A written document prepared by the chapter 11 debtor or other plan proponent that is designed to provide "adequate information" to creditors to enable them to evaluate the chapter 11 plan of reorganization.

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E

equity

The value of a debtor's interest in property that remains after liens and other creditors' interests are considered. (Example: If a house valued at $100,000 is subject to a $80,000 mortgage, there is $20,000 of equity.)

executory contract or lease

Generally includes contracts or leases under which both parties to the agreement have duties remaining to be performed. (If a contract or lease is executory, a debtor may assume it or reject it.)

exemptions, exempt property

Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors. For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor's primary residence (homestead exemption), or some or all "tools of the trade" used by the debtor to make a living (i.e., auto tools for an auto mechanic or dental tools for a dentist). The availability and amount of property the debtor may exempt depends on the state the debtor lives in.

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F

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G

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H

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I

insider (of individual debtor)

Any relative of the debtor or of a general partner of the debtor; partnership in which the debtor is a general partner; general partner of the debtor; or a corporation of which the debtor is a director, officer, or person in control.

insider (of corporate debtor)

A director, officer, or person in control of the debtor; 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.

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J

joint administration

A court-approved mechanism under which two or more cases can be administered together. (Assuming no conflicts of interest, these separate businesses or individuals can pool their resources, hire the same professionals, etc.)

joint petition

One bankruptcy petition filed by a husband and wife together.

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K

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L

lien

The right to take and hold or sell the property of a debtor as security or payment for a debt or duty.

liquidation

A sale of a debtor's property with the proceeds to be used for the benefit of creditors.

liquidated claim

A creditor's claim for a fixed amount of money.

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M

means test

Section 707(b)(2) of the Bankruptcy Code applies a "means test" to determine whether an individual debtor's chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor's aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.

motion to lift the automatic stay

A request by a creditor to allow the creditor to take action against the debtor or the debtor's property that would otherwise be prohibited by the automatic stay.

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N

no-asset case

A chapter 7 case where there are no assets available to satisfy any portion of the creditors' unsecured claims.

nondischargeable debt

A debt that cannot be eliminated in bankruptcy. Examples include a home mortgage, debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime. Some debts, such as debts for money or property obtained by false pretenses and debts for fraud or defalcation while acting in a fiduciary capacity may be declared nondischargeable only if a creditor timely files and prevails in a nondischargeability action.

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O

objection to dischargeability

A trustee's or creditor's objection to the debtor being released from personal liability for certain dischargeable debts. Common reasons include allegations that the debt to be discharged was incurred by false pretenses or that debt arose because of the debtor's fraud while acting as a fiduciary.

objection to exemptions

A trustee's or creditor's objection to the debtor's attempt to claim certain property as exempt from liquidation by the trustee to creditors.

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P

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.

petition preparer

A business not authorized to practice law that prepares bankruptcy petitions.

plan

A debtor's detailed description of how the debtor proposes to pay creditors' claims over a fixed period of time.

plaintiff

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

postpetition transfer

A transfer of the debtor's property made after the commencement of the case.

prebankruptcy planning

The arrangement (or rearrangement) of a debtor's property to allow the debtor to take maximum advantage of exemptions. (Prebankruptcy planning typically includes converting nonexempt assets into exempt assets.)

preference or preferential debt payment

A debt payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would receive in the debtor's chapter 7 case.

presumption of abuse

see means test

priority

The Bankruptcy Code's statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code's priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid.

priority claim

An unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Priority refers to the order in which these unsecured claims are to be paid.

proof of claim

A written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)

property of the estate

All legal or equitable interests of the debtor in property as of the commencement of the case.

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R

reaffirmation agreement

An agreement by a chapter 7 debtor to continue paying a dischargeable debt (such as an auto loan) after the bankruptcy, usually for the purpose of keeping collateral (i.e. the car) that would otherwise be subject to repossession.

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S

schedules

Detailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor's assets, liabilities, and other financial information. (There are official forms a debtor must use.)

secured creditor

A creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.

secured debt

Debt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. Examples include home mortgages, auto loans and tax liens.

small business case

A special type of chapter 11 case in which there is no creditors' committee (or the creditors' committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code contains certain provisions designed to reduce the time a small business debtor is in bankruptcy.

statement of financial affairs

A series of questions the debtor must answer in writing concerning sources of income, transfers of property, lawsuits by creditors, etc. (There is an official form a debtor must use.)

statement of intention

A declaration made by a chapter 7 debtor concerning plans for dealing with consumer debts that are secured by property of the estate.

substantive consolidation

Putting the assets and liabilities of two or more related debtors into a single pool to pay creditors. (Courts are reluctant to allow substantive consolidation since the action must not only justify the benefit that one set of creditors receives, but also the harm that other creditors suffer as a result.)

341 meeting

The meeting of creditors required by section 341 of the Bankruptcy Code at which the debtor is questioned under oath by creditors, a trustee, examiner, or the U.S. trustee about his/her financial affairs. Also called creditors' meeting.

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T

transfer

Any mode or means by which a debtor disposes of or parts with his/her property.

trustee

The representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee's responsibilities include reviewing the debtor's petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing the debtor's plan, receiving payments from debtors, and disbursing plan payments to creditors.

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U

U.S. trustee

An officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors' committees; monitoring fee applications; and performing other statutory duties. Compare, bankruptcy administrator.

undersecured claim

A debt secured by property that is worth less than the full amount of the debt.

unliquidated claim

A claim for which a specific value has not been determined.

unscheduled debt

A debt that should have been listed by the debtor in the schedules filed with the court but was not. (Depending on the circumstances, an unscheduled debt may or may not be discharged.)

unsecured claim

A claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor's assessment of the debtor's future ability to pay.

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V

Voluntary transfer

A transfer of a debtor's property with the debtor's consent.

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Posted by,

 
PATRICIA S. GARDNER, ESQ.
THE GARDNER LAW FIRM

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